The combination of an attractive yield and a general appetite for Japanese assets saw investors pile into the initial public offering of Croesus Retail Trust, leaving the S$365.3 million ($297 million) deal massively oversubscribed when it closed on Tuesday, sources said yesterday.
Croesus is listing in Singapore in the form of a business trust, but the four shopping malls that make up its initial portfolio are all located in Japan, which meant that investors were comparing it primarily to Japanese real estate investment trusts that trade in Tokyo (J-Reits).
And with an implied yield of 8% for the fiscal year to June 2014, Croesus definitely stood out.
On average, J-Reits offer a forward yield of only around 3% to 3.5%, although the two key comps, which are focused on commercial properties, are currently trading at a slightly higher implied yield of 3.4% and 3.8% respectively. Investors buying into Croesus would get a yield pickup of more than four percentage points compared to that.
The yield is also superior to that offered by CapitaMall Trust, Singapore’s largest retail Reit, which is trading at a 12-month forward yield of about 4.5%.
Given the current appetite for high-yielding assets, many investors clearly viewed this as too good an opportunity to miss out on, and one source said the Croesus IPO attracted more than 160 institutional investors. (On top of that there was also demand from private banks.) Unfortunately for them, 41.7% of the IPO (based on the final size) had already been promised to 11 cornerstone investors and the bookrunners had also lined up additional anchor demand, which meant the entire deal was already covered at launch.
As a result, more than a quarter of the institutional investors received no allocation at all, while others had to be scaled back substantially. Mirroring the cornerstone line-up, the buyers included a mix of real estate specialists, long-only investors and hedge funds, although the source said the hedge funds received less than 10% of the allocation.
Croesus is sponsored by Croesus Merchants International, which is owned by Jim Chang and Jeremy Yong. Chang has more than 20 years of business experience in Asia and Japan and more than 10 years of experience in the Asia real estate sector. Yong is a former investment banker with almost 18 years of experience across various industries, including real estate.
Adding to their credentials, the Croesus Group managed a residential real estate fund in Japan between 2007 and 2010 on behalf of Citi Property Investors.
The deal was offered at a fixed price of S$0.93 per unit, but the bookrunners kept some flexibility with regard to the number of units offered to institutional investors other than the cornerstones to ensure that the trust would be able to raise a sufficient amount to cover the acquisition cost of the assets. The acquisition will be paid for in Japanese yen, and since the exchange rate was fixed yesterday it wasn’t entirely clear how much would be needed in Singapore dollars.
In the end, Croesus sold a total of 392.771 million units, of which approximately 52.9% went to institutional investors. The number of units offered to cornerstones and retail investors was fixed at launch at 163.653 million units and 21.505 million units respectively, which based on the final deal size meant that the 11 cornerstones took 41.7% of the deal, while 5.5% will go to Singapore retail investors.
The retail offer will open today and close on May 8. The trading debut is scheduled for May 10.
The number of units sold to public investors including the cornerstones account for 92.3% of the trust. The rest will be sold to the sponsor (1.3%) and to strategic partners Daiwa House Industry and Marubeni Corp, which will each buy 3.2%. Daiwa House, which is one of the leading real estate conglomerates in Japan, is selling two shopping malls to Croesus that will go into the initial portfolio, while Marubeni, a leading Japanese trading firm, is selling one mall.
The two strategic partners will also own 10% each of the trustee manager. The remaining 80% will be owned by Croesus Partners, which in turn is 80% owned by the sponsor. The other 20% is owned by Masaharu Kodaka who, according to the prospectus, has spent almost 40 years with Chuo Mitsui Trust and Banking and has been involved in the listing of seven J-Reits worth in excess of ¥300 billion ($3.1 billion).
Croesus will be the first Singapore-listed business trust to hold retail real estate assets in Japan, although the prospectus notes that the trust will have a mandate to invest in retail assets across Asia-Pacific. The initial four malls have a combined valuation of ¥52.5 billion ($540 million) and a weighted average lease expiry of 11.3 years. As of the end of last year they were 100% occupied.
Like other business trusts, the key intention is for Croesus to pass on the bulk of its cash flow to unitholders. The trust will distribute 100% of its distributable income until June 2015 and at least 90% thereafter, which based on the projected earnings and the IPO price translates into an 8.0% yield for the fiscal year to June 2014 and 8.1% for the fiscal year to June 2015.
One important reason why the trust is able to offer such an attractive yield is that it is acquiring the four initial assets at a pretty low price. One source said the price was agreed around the middle of last year and the parties stuck with it even after Japanese asset prices started to edge higher towards the end of last year.
The yield is expected to be complemented by capital growth through acquisitions. The trust has rights of first refusal both from the sponsor group and from Daiwa House and Marubeni, which include two retail properties in China that are currently under development. It has also secured a first right to negotiate for the acquisition of another four Japanese properties from Marubeni and third party vendors. Croesus had initially planned to go public in the fourth quarter last year, but called off the deal after completing the pre-marketing. A key reason was that India-focused Religare Healthcare Trust had a very poor trading debut following its $416 million IPO in Singapore, making investors hesitant to look at other business trusts. The timing worked significantly better this time around as investors cannot seem to get enough of Japan at the moment. The Nikkei 225 index has risen a massive 58% since mid-November, including a 17.4% gain so far this year. That compares with a 6.4% gain in the Singapore Straits Times index year-to-date, and a 0.1% decline in Hong Kong’s Hang Seng Index.
The size of the deal is smaller though, since the options to acquire three of the original seven shopping malls expired after the initial listing attempt.
Having already done the pre-marketing once, Croesus chose to go straight into the institutional bookbuilding, which kicked off last Thursday. This meant it jumped ahead of two other Singapore business trusts that had started pre-marketing earlier that same week.
Next in line is Asian Pay Television Trust, which launched the bookbuilding yesterday for an IPO of up to $1.1 billion. The Macquarie-sponsored trust is in the process of acquiring cable TV company Taiwan Broadband Communications, which will be its sole asset at the time of listing. (See separate story on our website today.)
Investec Aircraft Leasing Trust (which previously went by the name of Investec Aviation Trust) hasn’t decided for sure whether it will go ahead, according to sources, but may follow suit on Monday. The trust is seeking to raise up to $500 million plus a greenshoe, although sources have earlier said that 30% of that, or about $150 million worth of units, will be taken up by the sponsor and the current owners of some of the aircraft that will go into the trust.