Croesus Retail Trust *Official* (SGX:S6NU)

[w1rbelw1nd]

Well, the numbers are out!

Please click on the link below:

https://docs.google.com/spreadsheets/d/1hin_lbh7GOR3TFReB7SzuL9BZLdxsc9c5SwwR9H_-DY/edit?usp=sharing

I played with 2 scenarios.

Scenario 1 - instead of using cash ($10M as stated in circular) to buy the TM, mgmt instead buyback current units issued at 5% premium. DPU increase to 8.07cents per unit, higher than internalisation exercise

Scenario 2 - instead of using cash ande debt ($10M as stated in circular) to buy the TM, mgmt instead buyback current units issued at 5% premium. DPU increase to 8.27cents per unit, higher than internalisation exercise

Please check through my workings/assumptions. I may be wrong with my work, happy to correct to give a correct simulation. My conclusion based on my current findings is: The increase in DPU is actually from usage of cash and debt rather than "value generated from the internatlisation", and this exercise by the management is actually value destoying for unitholders.

DYODD.

 

[w1rbelw1nd]

Some initial thoughts:
-No mention of currency risk (or I missed it) from buying the TM in the report? But I wouldn't worry too much as it's very likely that the TM's costs are paid mainly in JPY, since they are operating in Japan and have mainly Japanese employees.

The management should be paid in SGD, right? Trustee managers costs are mainly headcount costs, and as far as i know, they have an office here and substantial headcount is based here.

-Buying back Croesus shares brings about different synergies from buying the TM. So can't just compare numbers.

The thing is, what are the synergies involved in buying a TM? And if the management dont dare to project a optimistic figure in their projections, why go for the transaction? Yield is especially important for Business Trust investors.

 

[Asphodeli]

Edge magazine has a writeup on it:

 

[lzydata]

Anyway, realise that the circular is really not easily found (not even on freaking CRT website, wtf), please see link below for those intererested...

http://infopub.sgx.com/FileOpen/Croesus EGM - Circular.ashx?App=Prospectus&FileID=29296

The circular can be found where all circulars can be found, I don't see why it is hard for you to find.

http://www.sgx.com/wps/portal/sgxweb/home/company_disclosure/prospectus_circulars

 

[lzydata]

Well, the numbers are out!

Please click on the link below:

https://docs.google.com/spreadsheets/d/1hin_lbh7GOR3TFReB7SzuL9BZLdxsc9c5SwwR9H_-DY/edit?usp=sharing

I played with 2 scenarios.

Scenario 1 - instead of using cash ($10M as stated in circular) to buy the TM, mgmt instead buyback current units issued at 5% premium. DPU increase to 8.07cents per unit, higher than internalisation exercise

Scenario 2 - instead of using cash ande debt ($10M as stated in circular) to buy the TM, mgmt instead buyback current units issued at 5% premium. DPU increase to 8.27cents per unit, higher than internalisation exercise

Please check through my workings/assumptions. I may be wrong with my work, happy to correct to give a correct simulation. My conclusion based on my current findings is: The increase in DPU is actually from usage of cash and debt rather than "value generated from the internatlisation", and this exercise by the management is actually value destoying for unitholders.

DYODD.

Here's a quick point. The benefits of a share buyback is one time - unless the trust finds another $10m excess funds every year. The benefits of internalising the manager are recurring, as their annual profits go back into the trust.

 

[w1rbelw1nd]

The circular can be found where all circulars can be found, I don't see why it is hard for you to find.

http://www.sgx.com/wps/portal/sgxweb/home/company_disclosure/prospectus_circulars

Yea, guess its kinda new for me

Sent from OnePlus A0001 using GAGT

 

[w1rbelw1nd]

Here's a quick point. The benefits of a share buyback is one time - unless the trust finds another $10m excess funds every year. The benefits of internalising the manager are recurring, as their annual profits go back into the trust.

I don't think so. Once share buyback occurs, the total units outstanding is permanently lower. So the same amount of income is divided by the less units, and therefore higher dpu for the years to come. Its not one off.

Sent from OnePlus A0001 using GAGT

 

[lzydata]

I don't think so. Once share buyback occurs, the total units outstanding is permanently lower. So the same amount of income is divided by the less units, and therefore higher dpu for the years to come. Its not one off.

Sent from OnePlus A0001 using GAGT

No, if you want higher DPU every year, either income has to keep growing and/or the units have to keep falling.

 

[w1rbelw1nd]

No, if you want higher DPU every year, either income has to keep growing and/or the units have to keep falling.

Ok. Let me clarify. Once you decrease your number of units, you will have a sustained, higher dpu. You agree on that?

So how does internalising the management lead to increasing dpu over the years?

Sent from OnePlus A0001 using GAGT

 

[angtc11]

Just for everyone's consideration, since I am playing the Devil's advocate here.

We are dealing with management that has been issuing preferential offerings at substantial discount to market price, and done deals that are decreases dpu (as highlighted by windboi). These are facts.

Now, Jim and Jeremy wants to pay themselves (and their Japanese friends) a big fat bonus, and let the trust pay for it using preferential offerings, cash and debt. Leverage increase, fx risk increase, just for arguably a tiny increase in dpu. Perhaps the increase in dpu is just from leveraging up and using the cash? I can do a quick calculation later in the evening to see the effect if instead of the internalisation, the debt and cash is used to buy back Croesus shares instead. maybe that will shed some light about the real value added of the transaction.

We have been given the shorter end of the stick since the trust has been incorporated. I won't give management and chairman the benefit of doubt.

Sent from OnePlus A0001 using GAGT

The increase is DPU is because the profits of the TM goes back to the trust after internalization. That being said, I do agree with you that the justification of the exercise should be deliberated.

Referencing page 19 of their announcement which states the P&L of the TM http://www.croesusretailtrust.com/attachment/201606122119501700911662_en.pdf

It seems the profit (which will flow back to the trust after internalization) is being boosted mainly due to reduction of 214Mio in cost of sales which is explained in footnote 3 as comprising of 3 parts, out of which 2 are paid to sponsor. The reason given is because the TM is now capable to do the job, which is true regardless of whether the internalization takes place. Thus seems like a weak justification to window dress the internalization.

In light of this, it could be interpreted as the owner of the TM (which are also the sponsors) getting upfront payment of ~20 years revenue (4200 Mio purchase price versus 214Mio revenue)

 

[lzydata]

Ok. Let me clarify. Once you decrease your number of units, you will have a sustained, higher dpu. You agree on that?

So how does internalising the management lead to increasing dpu over the years?

Sent from OnePlus A0001 using GAGT

Every year the trust pays the manager management fees, which equals their costs of running the business plus their profits. Some are base fees assessed on the assets under management, some are ad hoc fees like performance fees and acquisition fees.

Every year the manager is paid, and every year this extra layer of profits leaves the trust to the owners of the manager. If the manager is internalised, those profits stay within the trust. In fact the trust has no reason to pay higher than the costs of running the business.

Those excess funds can be used to pay down debt if we are conservative - but there is no reason to be given the low JPY interest rates and the acceptable gearing level currently, 46.2%, which is not much higher than the cap for REITs. So more reasonably, these excess funds can be used for acquisitions or for working capital on projects like AEI, which should be accretive to DPU.

 

[w1rbelw1nd]

Every year the trust pays the manager management fees, which equals their costs of running the business plus their profits. Some are base fees assessed on the assets under management, some are ad hoc fees like performance fees and acquisition fees.

Every year the manager is paid, and every year this extra layer of profits leaves the trust to the owners of the manager. If the manager is internalised, those profits stay within the trust. In fact the trust has no reason to pay higher than the costs of running the business.

Those excess funds can be used to pay down debt if we are conservative - but there is no reason to be given the low JPY interest rates and the acceptable gearing level currently, 46.2%, which is not much higher than the cap for REITs. So more reasonably, these excess funds can be used for acquisitions or for working capital on projects like AEI, which should be accretive to DPU.

Unfortunately, mgmt not willing to show/commit any projections on that. Would love to see it.

And regardless, I think through my spreadsheet I have shown that the money is better used to reinvest in itself than to buy the trustee manager.

I hope we are all clear that Jim and Jeremy here are businessmen, they are not doing charity. Do we really believe they are forsaking their future profits for nothing? I think they gotten cash upfront at unitholders expense, and use some neat financial engineering to make e transaction palatable.

Sent from OnePlus A0001 using GAGT

 

[lzydata]

The increase is DPU is because the profits of the TM goes back to the trust after internalization. That being said, I do agree with you that the justification of the exercise should be deliberated.

Referencing page 19 of their announcement which states the P&L of the TM http://www.croesusretailtrust.com/attachment/201606122119501700911662_en.pdf

It seems the profit (which will flow back to the trust after internalization) is being boosted mainly due to reduction of 214Mio in cost of sales which is explained in footnote 3 as comprising of 3 parts, out of which 2 are paid to sponsor. The reason given is because the TM is now capable to do the job, which is true regardless of whether the internalization takes place. Thus seems like a weak justification to window dress the internalization.

In light of this, it could be interpreted as the owner of the TM (which are also the sponsors) getting upfront payment of ~20 years revenue (4200 Mio purchase price versus 214Mio revenue)

Agreed. I think and I'm hoping there will be a good discussion at the EGM to hammer out these issues because this is an unusual move and we don't really have any precedent to look at.

But I think it is roughly correct that we can take this figure of the manager's cost of sales, JPY214m, as going to the sponsor which is a company co-owned by Jim and Jeremy. So we will need to know how they are planning to replace their lost income, so to speak

If we go by Appendix H of the circular, the full pro forma calculations, we see that the trustee manager fee of JPY700,651,000 is taken off, while the other administrative expense item increases by JPY277,532,000 as now the staff's salaries are an expense of the trust, not the manager. It's basically this part that is giving the bump in distributable income.

 

[lzydata]

Unfortunately, mgmt not willing to show/commit any projections on that. Would love to see it.[/URL]

The pro forma calculations and particularly Appendix H of the circular is precisely the projection you are asking for. You are free not to believe them but don't say they didn't give one.

The circular in the KPMG section also contains the historical income statements of the manager.

 

[angtc11]

Agreed. I think and I'm hoping there will be a good discussion at the EGM to hammer out these issues because this is an unusual move and we don't really have any precedent to look at.

But I think it is roughly correct that we can take this figure of the manager's cost of sales, JPY214m, as going to the sponsor which is a company co-owned by Jim and Jeremy. So we will need to know how they are planning to replace their lost income, so to speak

If we go by Appendix H of the circular, the full pro forma calculations, we see that the trustee manager fee of JPY700,651,000 is taken off, while the other administrative expense item increases by JPY277,532,000 as now the staff's salaries are an expense of the trust, not the manager. It's basically this part that is giving the bump in distributable income.

I had a quick chat with their IR and understood that this practice of having an inhouse TM is the de facto practice in USA, Europe and Australia. Can anyone share if this is true based on your experience investing in overseas REIT/trust?

 

[w1rbelw1nd]

The pro forma calculations and particularly Appendix H of the circular is precisely the projection you are asking for. You are free not to believe them but don't say they didn't give one.

The circular in the KPMG section also contains the historical income statements of the manager.

I am speaking on how yield accretive the internalisation is beyond the next financial year.

You have given some possible cost savings that can be from the internalisation, but that does not translate to any promise/projections on dpu for the following years by the management.

In any case I think I will run a 3rd scenario in which the mgmt do the internalisation purely using preferential offering. Let's see if the transaction is yield accretive then. My guess is that it will probably lead to a lower dpu.

Sent from OnePlus A0001 using GAGT

 

[V_for_Vanilla]

The increase is DPU is because the profits of the TM goes back to the trust after internalization. That being said, I do agree with you that the justification of the exercise should be deliberated.

Referencing page 19 of their announcement which states the P&L of the TM http://www.croesusretailtrust.com/attachment/201606122119501700911662_en.pdf

It seems the profit (which will flow back to the trust after internalization) is being boosted mainly due to reduction of 214Mio in cost of sales which is explained in footnote 3 as comprising of 3 parts, out of which 2 are paid to sponsor. The reason given is because the TM is now capable to do the job, which is true regardless of whether the internalization takes place. Thus seems like a weak justification to window dress the internalization.

In light of this, it could be interpreted as the owner of the TM (which are also the sponsors) getting upfront payment of ~20 years revenue (4200 Mio purchase price versus 214Mio revenue)

I am interested in post-internalisation how are Jeremy Yong and Jim Chang's interests aligned with those of unitholders'? Seems like the two will no longer directly or indirectly hold shares in CRT? Will have to go through the IFA letter in detail.

 

[w1rbelw1nd]

I had a quick chat with their IR and understood that this practice of having an inhouse TM is the de facto practice in USA, Europe and Australia. Can anyone share if this is true based on your experience investing in overseas REIT/trust?

Thanks for the info, you brought some interesting points.

Hope to see you comment more man and share your views...

Sent from OnePlus A0001 using GAGT

 

[lzydata]

I am interested in post-internalisation how are Jeremy Yong and Jim Chang's interests aligned with those of unitholders'? Seems like the two will no longer directly or indirectly hold shares in CRT? Will have to go through the IFA letter in detail.

Yeah in fact, although their company is called the sponsor, neither it nor they personally own many units.

Just had an idea - maybe the trust should buy over the manager wholly or partly with units as consideration, rather than issue new units in a PO and then pay them cash. Would take $50m/0.8 = 62.5m units or 12% of the unit base.

 

[WindBoi]

Just for everyone's consideration, since I am playing the Devil's advocate here.

We are dealing with management that has been issuing preferential offerings at substantial discount to market price, and done deals that are decreases dpu (as highlighted by windboi). These are facts.

Now, Jim and Jeremy wants to pay themselves (and their Japanese friends) a big fat bonus, and let the trust pay for it using preferential offerings, cash and debt. Leverage increase, fx risk increase, just for arguably a tiny increase in dpu. Perhaps the increase in dpu is just from leveraging up and using the cash? I can do a quick calculation later in the evening to see the effect if instead of the internalisation, the debt and cash is used to buy back Croesus shares instead. maybe that will shed some light about the real value added of the transaction.

We have been given the shorter end of the stick since the trust has been incorporated. I won't give management and chairman the benefit of doubt.

Sent from OnePlus A0001 using GAGT

to be fair, eventually they bought one more stuff that became accretive.