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Why I sold off Croesus Retail Trust

I seldom like to talk about what I buy and what I sell.

Each wealth builder have different objectives to why they get into a certain stocks. Some investors could be using cash flow yielding businesses offering little growth such as REITs, trusts, matured business as a fixed income replacement, while others genuinely sees growth in these businesses.

Talking about what I buy and what I sell, to me breeds a lot of laziness in wealth builders who just buys what someone else is doing, because they are lazy to do their own prospecting.

Still I will talk about some of the thought process in the hopes that it helps other active investor contrast to their own approaches.

The original investing premise

I got interested in Croesus when I veered towards the theme of holding cash flowing stocks that do not derive their cash flow from Singapore.

Croesus and some other REITs fits the the bill here.

On a high level, Croesus manages some longer lease assets that derive their income in Yen. They leverage up high in an environment where the interest rate is very low. The net property income yield was around 6-7% and their borrowing cost is less than 2%, in a country that have been trying to engineer some form of growth.

This looks like a good place to park the money, gain the cash flow.

The local J-REITs all trade at 3% dividend yield, with leverage, so this does not make Croesus expensive. In fact against them, Croesus look cheap.

The risk to this business is that, we don’t know the manager that well, and for trusts that are a financial engineering company managing cash flowing assets, the manager is rather important.

The currency is a risk, but I do see things going the other way. A depreciating currency is to encourage growth, and if there are growth effects, then the asset value appreciates which means there is growth in the value of the trust.

Croesus also hedge their cash flow for 2 years (now probably 3 years?)

Unlike some of the known managers who have navigate tough spaces, such as FCOT management, Bow Spirit who manages First REIT, the Mapletree Investments, these new IPO managers such as IREIT, and Croesus is a mystery, and if you want to get invested, you better watch what they do like a hawk.

Their recent aquisition

Croesus last acquisition was in Sep 2015 which I talked about here, where they acquire a mall with 40% debt and 60% equity. That was accretive.

In recent times, they announced placing out 60 million units and $60 million in EMTN.

An acquisition seem on the cards.

Before the announcement of the EMTN, I was wondering if there are really so many great deals around that they are going to make another acquisition so fast.

Without the debt, if you compare the current cost of capital, in this case the cost of equity, which is the dividend yield of nearly 9-10%, you are not going to find an accretive acquisition to shareholders in an environment.

Soon they announced the purchase of Fuji Grand Natalie for SG$40 mil, which in their opinion is accretive.

How is this acquisition accretive?

The cost of debt cited by one analyst report describe that this acquisition will be funded by debt with a cost of debt of 0.65%. From what was provided of the EMTN, the swap interest cost looks much higher than that.

The slides presentation describes that this acquisition is funded by the private placement.

When I look at the slides that explains whether the acquisition was accretive, I was taken aback how it could be accretive. If you use only SG$40 mil out of SG$110 mil to make the acquisition, with a dilutive placement, that has to not raised the DPU.

The left graphic is the most absurd. If you dare buy a property that is below the current cap rate, unless there is some tremendous growth in the rental,  the shareholders will be coming for your blood. This shouldn’t be entirely necessary. It comes across as educating to the investors, that if your NPI yield of new property is more than that of the NPI yield of existing property, it is accretive.

Update: 20160503

If we look at the first pro-forma provided, it factors in the total amount of units issued as a placement at $0.75 (which is very below the trading price of $0.80). Here factoring the new net property income it is NOT accretive.

However, below this section, this shows how it could have been accretive, that is by factoring in only 23 mil of the new placement units instead of 70 mil.

If majority of this acquisition is funded by the debt portion, unless they acquire one more thing, shareholders are better off not buying this asset.

Why wasn’t Perpetual Bond attractive to Japanese investors?

In the briefing for the first placement, the management explained that the placement route wasn’t their first choice. They initially wanted to issue perpetual bonds to investors but the pricing was not good. The Japanese investors showed little interest in the Croesus bonds. Hence the rights issue.

We all know that interest rates in Japan is low, and if you are looking for higher yielding investment, a CRT bond should appeal. More so if its backed by a portfolio of shopping centers leased out at a long duration. Cash Flow is predictable.

What are we missing here? Could it be that the bonds or Croesus is unrated thus the investors are not interested?

Unless it is the latter, it does make me question if the Japanese investors know about the assets more than we do.

Manager’s alignment of interest

The biggest holders have been funds and the manager do not own large part of the stock. Compare to a sponsored REIT, their motivation could be to do a good job And increasing their performance fees.

Something similar could be ireit where the manager does not own a large portion but 2 big shareholders having their wealth in it. We can infer that Tong approached the managers to try to create a REIT so that he can park his money there and the manager would have an incentive not to create stupid deals for someone who is also in the industry.

In the case of Croesus, this recent acquisition does not shout to me as a splendid deal at 6.3% NPI. And it looks to me as a forced move, which made me question how much alignment to shareholder’s interest.


All things considered, there are much question marks that left unanswered. If you are an investor who have access to the manager, and are comfortable with them, you might have a different interpretation on things.

I decide to trust my gut on this and err on the safe side. I will stand on the sidelines again and observe.

For all you know, Kyith is again being too cautious and making something simple look extremely complicated.

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Wednesday 28th of June 2017

Heh, guess you were short a year early.


Wednesday 28th of June 2017

Hi Yong, I did not short the company.


Thursday 23rd of February 2017

Hi Kyith,

I am puzzled by this sentence: " It comes across as educating to the investors, that if your NPI yield of new property is more than that of the NPI yield of existing property, it is accretive."

I thought of in the graph at above, on the left hand side, NPI was being compared?


Saturday 25th of February 2017

hi ken, that is my precise point. It is right to say that based on NPI what they bought is higher yielding then that in the past. however, we look at it from share investor perspective. suppose this evaluation is done when croesus is trading at book value, it is an equal comparison. however, as an investor suppose the debt leverage, and the price movement resulted in the dividend yield of croesus be closer to 8%, then which is the better deal for the shareholder? to remain at status quo and earn 8% dividend yield or to buy and asset and see their dividend yield be lowered to 7.7%? the slide is not wrong, but it shifts the perception that this acquisition is really good.

Hong wei

Tuesday 3rd of May 2016

Hi Kyith

Nice article shining a light on their accounting of the funds they received from private placement versus EMTN. Can I say that the main issue is they have not found a use for the remaining 70mio and it is dragging down the dpu? Their task now is to get an acquisition opportunity of about (35. 25+37.25) mio. 35.25mio being the remainder of private placement and 37.25 being the remainder of EMTN. Thus NPI needs to be approx (10%/2+2.65%/2)=6.33% where 10% is the placement cost of capital and 2.65% is the EMTN swapped cost of capital. Took a shortcut by averaging since 35mio and 37mio is quite close

For investors, the risk is if they are unable to find an acquisition and the dpu is stuck at 7.3c which gives a yield of 8.9%

Not vested but monitoring


Wednesday 4th of May 2016

hi Hong Wei, nicely done there. And 8.9% looks to be still a very good yield


Tuesday 3rd of May 2016

The graphic and the update you provided don't seem to match (at least can't make sense of any DPU), not sure which ones the management want us to look at.

I think there are still fringe benefits to having a larger trust, even with non-accretive acquisitions: more liquidity, better financing conditions and the ability for some shareholders to use the shares as collateral and leverage (as many banks will not take small caps as collateral, or only at much lower valuation).

Regarding Croesus REIT as an investment, we get a significant higher yield compared to similar, well managed mall REITs, so I guess there's some cushion against management problems (of course within limits...)


Wednesday 4th of May 2016

hi Pierre, you are the kind of readers that I am happy to have more of, because you can independently see and come to a conclusion different from mine. What you said is the other side of the story plaguing me.In the end I choose to be an observer for a period of time.


Tuesday 3rd of May 2016

Hi, sorry I may have misunderstood something. In the slides, the NPI yield of the new mall is 6.5%, while the existing portfolio is 5.5%. Doesn't that make the acquisition accretive?

Please let me know if I read wrongly. A great post as always. Not every blogger would bother to explain why they did something. I learnt much from your posts.


Tuesday 3rd of May 2016

Hi Goh, that makes it accretive on an NPI level, but not to you as a shareholder. There is always 2 areas you need to evaluate. The first area is whether you are buying the assets at an expensive or a a cheap price. That is this comparison of the NPI yield of your existing assets (current npi / current mall value) versus this new mall. If they buy an expensive mall they have to justify the growth.

The second part (i just updated what is in the document, please take a look at the article again) compares you as a shareholder, buying it at $0.82 and whether it is worth while for them to help you add this mall into the mix.

the important thing here is that eventually, whether placement, rights issue, debt issue, your dividend per share is not marginalized. The right graphic seem to give you the idea it is not. but inside a clear illustration it is.

hope this helps.

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