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Lessons learnt from Croesus Retail Trust

The Edge Singapore
The Edge Singapore7/3/2017 08:00 AM GMT+08  • 5 min read
Lessons learnt from Croesus Retail Trust
SINGAPORE (July 3): There was little to suggest that Croesus Retail Trust would leave any significant mark on the local real estate investment trust sector when it listed in 2013. For starters, it is not even a REIT. It is a business trust that simply cho
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SINGAPORE (July 3): There was little to suggest that Croesus Retail Trust would leave any significant mark on the local real estate investment trust sector when it listed in 2013. For starters, it is not even a REIT. It is a business trust that simply chose to behave like a REIT – notably by paying out all of its distributable income. CRT was also not backed by a major property development group with a pipeline of assets for it to acquire and grow. Also, all its properties were in Japan, making them unfamiliar to many investors in Singapore.

Reflecting these negative factors, CRT was trading at stubbornly high yields within months of its listing. Yet, it managed to develop a decent following among investors, including some institutional investors, by sticking to what it had set out to do. Over the last three years, CRT managed to steadily grow its revenue, net property income and distributable income. Its unitholders earned a good return despite its unit price remaining painfully depressed.

REITs are designed to deliver the bulk of their total return through their distributions. While some REITs trade at higher yields than others, what really matters is how much cash their underlying assets deliver. In short, the quality of a REIT’s assets and management count for more than anything else.

CRT is not, of course, the only well-run REIT in the local market. Its real claim to fame is that it chose to internalise its manager, abandoning the external management model that every other locally listed REIT has adopted. The external management model is widely said to be advantageous to REIT sponsors, and it is one reason some foreign REITs have chosen to list in Singapore. REITs in more developed markets such as the US and Australia are typically internally managed, which some observers say better aligns the interests of their managers with those of their unitholders.

The big question is how much a REIT should pay to achieve that alignment of interests. CRT acquired its manager last year for $50 million. The acquisition was part-financed by a 1-for-22 preferential offer of 27.7 million units at 79.7 cents a unit, which raised $22 million. The remaining $28 million was funded partly by $10 million that CRT had on hand, and partly by the proceeds of a $60 million bond issue in April last year.

The principal owners of the manager were Jim Chang and Jeremy Yong, currently CEO and managing director, respectively, of CRT. Chang and Yong provided assurances that they would not abandon CRT after selling it the manager. They also agreed to spend $16 million of the monies they received to purchase units in CRT in the market. Meanwhile, the whole internalisation exercise was presented as a transaction that would boost CRT’s distributions per unit. Yet, when it was put to a vote, it garnered just over 66% support. This was more than the simple majority needed to pass, but it suggested that a significant number of unitholders were not in favour of the deal.

Whatever the benefits of having an internalised management structure, the lesson from CRT’s experience is that internalising an external manager for a price has the potential to draw resistance from investors. If more REITs have an internalised structure in the future, it is likely to be because they came to market that way.

Now, as CRT prepares to be delisted and taken private, it is perhaps delivering its final and most important lesson to the REIT sector. On June 28, it said funds affiliated to Blackstone Real Estate had offered to acquire all its units at $1.17 each. This is 38% more than CRT’s volume weighted average price for the last 12 months. It is also a 24% premium to CRT’s last transacted price before trading was halted on June 27, ahead of the announcement of the deal with Blackstone’s funds. It is also a nearly 22% premium to CRT’s net asset value (NAV) as at March 31 of 96 cents a unit. In fact, the $1.17 offer price is more than CRT’s highest ever closing price of $1.09, set shortly after it listed in 2013.

Unitholders of CRT also stand to collect another payout before parting with their units. Under the terms of the offer from Blackstone’s funds, if the transaction is completed on or before Oct 31, unitholders may receive distributable income of about $31.3 million, representing 4.06 cents a unit.

CRT is not the only REIT to turn to private equity investors to obtain a valuation it could not get in the public market. Saizen REIT, which held Japanese residential properties, did something similar two years ago. On Oct 23, 2015, the manager of Saizen REIT said it had received a firm offer from Lone Star to acquire all the REIT’s properties at a price that was 3% above its reported NAV. At an EGM, 92% of its unitholders approved the sale of the assets and a return of the cash proceeds.

Clearly, other REITs trading at high yields and discounts to their NAV ought to do right by their unitholders and pursue similar monetisation initiatives.

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