Croesus Retail Trust

[Nick]

As I was running through the numbers for the latest 2Q16 financial report, I notice but don't quite understand the JPY 583.5M loss on derivative financial instruments which led to a negative net profit after tax. Would any VB be able to shed some light on what this is as well as its impact on the business? Thanks. (vested)

It is the fair value movement of their currency hedges. Their distributions are hedged since the income is denominated in Yen while the dividends are paid in SGD. It is a non-cash item though it does reflect the currency risk inherent in investing in this business trust.

(Vested)

[tanjm]

As I was running through the numbers for the latest 2Q16 financial report, I notice but don't quite understand the JPY 583.5M loss on derivative financial instruments which led to a negative net profit after tax. Would any VB be able to shed some light on what this is as well as its impact on the business? Thanks. (vested)

It is the fair value movement of their currency hedges. Their distributions are hedged since the income is denominated in Yen while the dividends are paid in SGD. It is a non-cash item though it does reflect the currency risk inherent in investing in this business trust.

(Vested)

Ah... My earlier reply was generically for an interest rate hedge, but a similar argument exists for a currency hedge.

[sykn]

Thanks to tanjm and Nick for your explanations; I took a further 1-hour tutorial last night from my son who works on FX structuring with a foreign bank. Wow, it does get quite complicated.

It says in note (a) on page 4 of the 1Q16 CRT financial report, that JPY 583.5M fair value loss was due to a market forward currency contract used to hedge distributions; now we know that the income available for distribution is around JPY 1B a Quarter or JPY 4B a year. So to lose JPY 0.58B on the contract must mean that the the JPY must have moved considerably in this last period (did it really?), unless the forward contract went beyond just hedging the distributions to a bit of "speculative bets"! With my "kindy level" understanding, I am not able to answer my own question, so wonder if somebody with more cheem knowledge can?

It also says in note (b) of the same page that a further JPY 106.323M fair value losses was due to cash flow hedge (both cross currency swap and interest rate swaps) on borrowings. Now, on page 6 of the report, it says that out of the JPY 46.775B borrowings, only JPY 8.364B was taken out in SGD on the MTN; the rest of the loans and bonds look like they were taken in JPY. Again with my limited understanding, it appears strange to me that the losses on this latter cross currency hedging (JPY 8.36B of SGD borrowing) incurred only some JPY 106M of losses, whereas the earlier hedging of some JPY 4B of distribution incurred 5 times the losses! Is there something wrong here?

[owq]

Thanks to tanjm and Nick for your explanations; I took a further 1-hour tutorial last night from my son who works on FX structuring with a foreign bank. Wow, it does get quite complicated.

It says in note (a) on page 4 of the 1Q16 CRT financial report, that JPY 583.5M fair value loss was due to a market forward currency contract used to hedge distributions; now we know that the income available for distribution is around JPY 1B a Quarter or JPY 4B a year. So to lose JPY 0.58B on the contract must mean that the the JPY must have moved considerably in this last period (did it really?), unless the forward contract went beyond just hedging the distributions to a bit of "speculative bets"! With my "kindy level" understanding, I am not able to answer my own question, so wonder if somebody with more cheem knowledge can?

It also says in note (b) of the same page that a further JPY 106.323M fair value losses was due to cash flow hedge (both cross currency swap and interest rate swaps) on borrowings. Now, on page 6 of the report, it says that out of the JPY 46.775B borrowings, only JPY 8.364B was taken out in SGD on the MTN; the rest of the loans and bonds look like they were taken in JPY. Again with my limited understanding, it appears strange to me that the losses on this latter cross currency hedging (JPY 8.36B of SGD borrowing) incurred only some JPY 106M of losses, whereas the earlier hedging of some JPY 4B of distribution incurred 5 times the losses! Is there something wrong here?

If I'm not wrong, Croesus usually hedges their income for a year or more. If you check the annual report, there were about 4.9B JPY worth of forward currency contracts. I'm not sure at what exchange rate they hedged at, but let's take a guess that they hedged at 91 sgd/jpy (around Dec 2014). At 1Q16 statement date, exchange rate is about 84. That's about 8% difference. As for the currency swap, they locked in at about 81.76 sgd/jpy for the principal. That's about 2.7% difference. Anyway the losses/gains are just accounting treatment and what really matters is how much sgd you get in the end which is already fixed by the contract.

[tanjm]

Thanks to tanjm and Nick for your explanations; I took a further 1-hour tutorial last night from my son who works on FX structuring with a foreign bank. Wow, it does get quite complicated.

It says in note (a) on page 4 of the 1Q16 CRT financial report, that JPY 583.5M fair value loss was due to a market forward currency contract used to hedge distributions; now we know that the income available for distribution is around JPY 1B a Quarter or JPY 4B a year. So to lose JPY 0.58B on the contract must mean that the the JPY must have moved considerably in this last period (did it really?), unless the forward contract went beyond just hedging the distributions to a bit of "speculative bets"! With my "kindy level" understanding, I am not able to answer my own question, so wonder if somebody with more cheem knowledge can?

It also says in note (b) of the same page that a further JPY 106.323M fair value losses was due to cash flow hedge (both cross currency swap and interest rate swaps) on borrowings. Now, on page 6 of the report, it says that out of the JPY 46.775B borrowings, only JPY 8.364B was taken out in SGD on the MTN; the rest of the loans and bonds look like they were taken in JPY. Again with my limited understanding, it appears strange to me that the losses on this latter cross currency hedging (JPY 8.36B of SGD borrowing) incurred only some JPY 106M of losses, whereas the earlier hedging of some JPY 4B of distribution incurred 5 times the losses! Is there something wrong here?

If I'm not wrong, Croesus usually hedges their income for a year or more. If you check the annual report, there were about 4.9B JPY worth of forward currency contracts. I'm not sure at what exchange rate they hedged at, but let's take a guess that they hedged at 91 sgd/jpy (around Dec 2014). At 1Q16 statement date, exchange rate is about 84. That's about 8% difference. As for the currency, they locked in at about 81.76 sgd/jpy for the principal. That's about 2.7% difference. Anyway the losses/gains are just accounting treatment and what really matters is how much sgd you get in the end which is already fixed by the contract.

i see the answer on page 6. The biggest derivative risk is on the $100 million SGD of cross currency swap to hedge the currency risk of the 100 million SGD loan, probably locked in at about 81+. You only need a small swing in FX to get a largish swing in P&L. 

The question is why the heck is CRT getting a SGD loan!

[owq]

Well, I suppose it's to diversify their financing. Many REITs do that.

[touzi]

Well, I suppose it's to diversify their financing. Many REITs do that.

Most S-REITS have operation & assets in Singapore, CRT doesn't. I was thinking it has to do with paying dividends, but they have already hedged.

[owq]

Well, I suppose it's to diversify their financing. Many REITs do that.

Most S-REITS have operation & assets in Singapore, CRT doesn't. I was thinking it has to do with paying dividends, but they have already hedged.

Can't think of any example off my head, but I think even S-REITS with only operations & assets in Singapore also issue debt in other currencies.

[starcraft_76]

3.5cts dividend declared for period of July 1 ~ Dec 31, 2015

http://www.croesusretailtrust.com/attach...178_en.pdf

This would translate to about 8.75% yield with the current price of S$0.80.

(vested)

[Nick]

3.5cts dividend declared for period of July 1 ~ Dec 31, 2015

http://www.croesusretailtrust.com/attach...178_en.pdf

This would translate to about 8.75% yield with the current price of S$0.80.

(vested)

I had estimated 3.60 cents 1H DPU so I was slightly off. Fairly predictable results due to the fixed rent from long master leases.

3Q DPU will be higher with a full quarter contribution from the recent M&A of Torius Property. It only had 2.5 month contribution in 2Q 16.

On a full year basis, the current yield is estimated to be 9.5% (my own estimates). A far cry from J-REITs dividend yield range of 2-4%. Management has hedged forex risk for 2016 and 2017.

(Vested)