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  • Buy Japanese real estate through J-REITs
    Latest development
    We have all seem the devastating effects of the earthquake and following tsunami and the tense nuclear situation. The victims have my deepest sympathy and I am convinced that the Japanese people will find a way to emerge from this like they have done in previous times of difficulty. It also appears like the Fukushima plant situation is already improving. The impact on the J-REITs can be seen on the widely followed J-REITs index (TSEREIT:IND) from

    From an investment perspective I would like to point out that Japan does not suffer from having too little capacity so I expect that only parts of what was destroyed will be rebuilt. This should help balance the supply / demand situation in many business as people never return in full to the affected areas. This is also what happened following the Kobe quake in 1995. Most J-REITs have posted messages on their respective websites saying that they only experience minor damages like a few tiles coming of the facade of their buildings or some ceiling panels falling down.

    So net net I see this as positive for the J-REITs that were not affected on the medium to long term.

    Original investment rationale
    I have been bullish on J-REITs since April 2010 for a number of reasons see here:

    1. Many trade at a discount to the appraised value of the properties they own.
    2. The yields are high especially compared to long term JPY yields even though they don't pay out the depreciation which you often see in other country REITs.
    3. The financing structure is not aggressive. Usually around 50:50
    4. Vacancy rates appear to be peaking (see charts below)
    5. Rents historically bottom 12 months later
    6. The entire net income is paid out as dividends and J-REITs are virtually tax exempt.
    7. 4+5 leads to rising appraisal values which enables the J-REITs to borrow more to acquire additional properties which in turn raises their dividend
    8. The next recession comes and the cycle starts over

    We are currently at step 4 so there is a long time before we need to start worrying about step 8.

    Below is the Miki Shouji Office Index (MIKIMT07:IND) which shows vacancy rates from the 5 central wards of Tokyo from

    Below is the same index but in long term perspective:

    My favorites were

    Japan Hotel and Resort, 8981
    Japan Office Investment Cooperation now called Ichigo Real Estate Investment Corp, 8983
    United Urban Investment Cooperation now called Yunnaiteddo Aban Toshi Hojin, 8960, UUICF.PK

    I luckily sold my position in Japan Hotel and Resort at 260.000 in December and February but have now bought it back at 178.000 which implies a dividend yield of about 7-8%.

    United Urban has almost regained most of its recent losses so I have reduced that position to 1/3 and exited Japan Office Investment Cooperation at a nice gain after its refinancing issues were resolved.

    My favorites are now

    Japan Hotel and Resort
    You would think that the earthquake would be bad for business. I did some checking and it doesn't seem like it. Of the five hotels with variable rents 4 are either booked out for weeks or have much higher rents than usual. I suppose this is driven by people leaving disaster struck areas to live in hotels in safer areas or by relief workers living in hotels in disaster struck areas.

    I think the next step will be that business returns to normal within 6 months. So I am expecting a good March and April followed by weaker May and June and then relatively quickly back to normal. 

    Nippon Hotel Fund Investment Corp, 8985, NPPHF.PK
    It appears to be a similar situation to Japan Hotel and Resort but they only produce limited information in English so am not too well informed on this company.

    Mori Hills, 3234
    Tokyo focused high quality buildings and forward yield of around 6%. High quality buildings and making strides to achieve a long term yield of 10.000 JPY per share.

    Above three companies display rising yields and if we look for longer term turnaround stories then I still like Japan Office Investment Cooperation and United Urban.

    Other REITs are:
    8976, DAFVF.PK
    8975, FCRDF.PK
    8963, TGIVF.PK
    8972, KDXRF.PK
    3227, MREIF.PK
    8985, NPPHF.PK
    8959, NREOF.PK
    8973, JORIF.PK
    8982, TPRYF.PK

    Japanese Quantitive Easing
    In late 2010 the Bank of Japan committed to buying ETFs and J-REITs as part of its QE and it has now decided to double its efforts. The J-REIT market is not particularly liquid and the implication of this scheme is that the BOJ will own 3.7% of the market when the program is completed and account for about 10% of all daily volume! This is a very powerful program.

    Some of the J-REITs trade on the US exchanges but are not liquid so I would recommend to invest in them directly on the Japan exchange.

    For the patient investor I believe the J-REITs space will provide great capital appreciation gains as the economic cycle evolves and occupancy rates and rents rise and while we wait for that high dividend yields.

    Disclosure: Long Japan Hotel and Resorts and United Urban and may go long other is in the coming days.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am long Japan Hotel and Resort and United Urban Investment Cooperation but they are not available in your selection
    Mar 18 7:32 AM | Link | 4 Comments
  • Cash on Sale!
    Japanese Companies Trading below Book Value
    Many Japanese companies trade at significant discounts to book value. This should in theory present opportunities for value investors with patience who don't rely on margin. The investment approach is very easy to apply in theory but much harder in practice. The two challenges are the following. Establishing a correct book value and having the conviction to wait for years in many cases to see your investment thesis turn out profitable.

    Establishing a correct book value
    Book value can be rather hard to have a firm opinion on when the assets in question are of a illiquid or fixed nature and you can't estimate how market prices have developed. Examples are inventory which may or may not be worthless. Out of fashion clothes or outdated electronics equipment may not equal book value while commodity inventory like gasoline for a refiner most likely is not too far off. In Japan one should especially be weary of the book value of land and property as these may be tremendously overstated.

    Be sure you established the book value correctly and secondly avoid companies that have the potential to produce significant losses that eat up your margin of safety.

    Ryoyo Electro (semiconductor trader)
    I believe I have found the perfect candidate in the shape of Ryoyo Electro listed in Japan under 8068 and in US under RYOYF:PNK (in practice I think you can only trade the 8068). I believe it is because it is so clear what the book value is and it is so far above the current market cap.

    Key numbers (all in million JPY):
    Market cap: 21420
    Total liabilities: 13108
    Total assets: 76054
    Of which cash, bonds and receivables: 21828+12026+24705 = 58559
    This means that if we value the remaining assets at 0 then the book value is equal to 58559 - 13108 = 45451 or twice the market cap. The current dividend yield is 3.84% and it has a P/E of 22.

    I want to stress that this is by no means a great company and it approximately earns the equivalent of the 10Y JGB yield on its equity but if anyone wants to buy 10Y JGBs they should also be interested in this. It is after all trading at 1/3 of book value and 1/2 of a conservative book value. 

    If you are technically inclined (which I am not) then now may also be a good time to enter the Japanese market as it tightly follows USD/JPY which in turn follows the interest rate spread between 10Y USD and 10 JPY yield and all three are currently breaking out on the upside.

    In the long run once investors gain appetite for equity investing this stock should easily double and in the meantime 3.5% is an attractive dividend. Remember to hedge your JPY exposure!

    S Foods
    On a side note I also like S Foods Inc (2292), which I came across on my search. S Foods is primarily a meat processing company. It is not as cheap on a book value evaluation (0.62) but it is growing income and revenue and has a P/E of 7 and dividend yield of 3.5%. These are to me attractive ratios growing revenue and income in a declining markets says something about the quality of the management.

    Disclosure: Long: Ryoyo Electro and considering to go long S Foods
    Nov 19 7:54 AM | Link | Comment!
  • J-REITs, A multitude of trends come together to support a depressed asset group

    Our Investment Philosophy

    JB Capital Management

    At JB Capital Management we invest with the objective of realizing superior medium to long-term returns by investing in companies that at their current prices offer attractive returns when considering their inherent risks. We therefore don’t attempt to beat the market on a short-term basis or even on a long-term basis but rather to generate a satisfactory income for our investors just like any other business. And rest assured we are the Fund’s biggest investor so we have your interests very close at heart.


    As value investors we look globally for healthy assets selling at depressed prices and we believe we found this in the Japanese Real Estate Investment Trust (J-REITs) market. This is perhaps not so surprising as the combination of real estate and Japan is a frightening combination to many people.



    First the Conclusion


    We have in this month added United Urban Investment Corp (8960) and Japan Office Investment Corp (8983) to our long portfolio. We expect both to benefit from a combination of falling in vacancy rates primarily in Tokyo, later rising rents while benefiting from falling interest rates and tightening lending margins.  In addition to this both companies trade at significant discount to their book value even after adjusting the book value for the latest appraisal value of the properties.


    We have since April 2010 had Japan Hotel and Resort (8981) in the portfolio as we expected hotel earnings to bottom out earlier as they reset their vacancies and rates overnight. We see further upside for this stock as well.




    J-REITs business model and industry

    There are about 4o listed J-REITs usually numbered 32xx or 89xx on the Tokyo Stock Exchange. They normally distribute 100% of net income to avoid being subject to tax. They are able to distribute more (e.g. depreciation) but I have not come across this in practice. They are normally financed with 50% equity and 50% debt, which is lower debt financing than many of their US counterparties such as VNO and ACC.  The J-REITs have different focuses such as office, residential, hotels, logistics, retail, mixed and Tokyo / non-Tokyo focused. The current yield is about 5.5% for the industry compared with around 1% for 10Y JPY government bonds.


    The different REITs have experienced very different price developments during the recent 3 years. They key drivers have in our opinion been:


    • Length of tenant contracts and thereby exposure to falling rents and occupancy rates
    • Size of J-REIT. The bigger have generally done relatively better
    • Sponsor. The role of the sponsor is somewhat special but it is safe to say that a strong sponsor has helped the particular J-REITs to achieve attractive financing terms which matters tremendously for profitability of the J-REITs
    • Those with long finance duration have been less exposed to rising financing costs and held up better


    Below is a chart of one of the widely followed J-REITs index (TSEREIT:IND) from

    Industry outlook

    The Japanese economy is like the the rest of the world in a recovery. Vacancy rates peak with a lag after the through in GDP and this appears to be happening currently in Tokyo as below chart shows. It is the Miki Shouji Office Index (MIKIMT07:IND) which shows vacancy rates from the 5 central wards of Tokyo from

    In a longer perspective things look like a rerun of early in the last decade. Same index just different timeframe:

    Asking rates last time bottomed a year after vacancy rates peaked so in 2004. This should put us on track for first seeing a stabilization in rents and then a rising rates as of late 2011.


    Most of us know that the Japanese population size is on a declining path. This is not constructive for real estate but what most people don’t know is that Tokyo actually continues to grow so this should not concern us at least for REITs that focus on Tokyo. Many are quick to write off Japan but the GDP of Tokyo is larger than that of Canada and it remains the city that is home to the largest number of Fortune 50o companies in the world.


    We therefore believe that as the recovery continues we are on track to enter the positive cycle of falling vacancy rates, increasing rents, falling financing costs, rising appraisal values, lower Loan-to-Value ratios and eventually asset acquisitions. This will be probably be the time to look for something different like bonds but it is many years away.


    We have researched the J-REITs market and looked for companies that are poised to benefit the most from above expected dynamics. This means companies that trade at low valuations relative to their appraisal adjusted book value, high vacancy rates and short outstanding rent agreements so that revenue can improve the quickest, high financing costs and short loan duration, Tokyo focused as we have more faith in Tokyo versus the rest of Japan and signs that net earnings are about to increase.


    Japanese QE

    The Japanese Central bank has recently announced that it will invest a significant amount in ETFs and J-REITs as part of is QE subject to approval from the MOF. This is a very radical move and in our opinion under reported by the media. Given the small size of the J-REIT market and the at times poor liquidity this could be a huge boost to prices. This is a bit of a joker but fortunately we don’t rely on it at all.


    Our picks


    United Urban Investment Corp

    UUI itself is a large REIT with stable income and low financing costs and as such doesn’t fit above requirements. It is however merging with Nippon Commercial Investment Corp, which fits the bill exactly. The companies have comparable assets but NCI trades at an adjusted book value of 0.29, which means the combined company will be at 0.72. NCI has already refinanced many of its loans following the planned merger with its stronger partner and we expect the 2011 dividend yield to be 8.7% and 9.3% for 2012. This is a full 8% on average above the 10Y JPY government bond yield.


    Japan Office Investment Corp

    JOI currently has an occupancy rate of 88.2% (partly because it recently lost a large tenant) and it expects a dividend yield of 6.3% in 2010. It has very high financing costs as has been relying on loans from GE but it is currently negotiating with number of domestic banks for more attractive terms. As financing costs come down and occupancy increases the dividend will go sharply up. We don’t think it is unlikely that financing costs will fall by at least 1/3 and that revenue can increase by 6%. This would bring the dividend yield to 14%. As a historic reference the company produced a net income in 2007 and 2008 that was more than 3 times as high as what is expected for 2010.


    Japan Hotel and Resort Inc

    Today after market close JHH reported its annual result for the year ending in August 2010. It produced an EPS/dividend per share of 12640 JPY, which is above the 11913 for 2009 and is guiding 14358 for 2011. My model says it will be 10-15% higher but I need to dive into the presentation material when it comes out tomorrow. 14358 leads to a dividend yield of 7.6% at the closing price of today.  Its adjusted price to book value is about 0.60. Even though the share price has already come a long way there should be plenty of more room on the upside.


    UUI, JOI and JHH Business Risk


    J-REITs have a somewhat peculiar financing structure with long lived assets and financing that rarely has a duration that is longer than 3-5 years. This puts them at the mercy of banks when the market for credit is tight.


    Our take:  This indeed was an issue 1-2 years ago. Central banks have however come together to make sure that liquidity is no longer an issue. It should also be noted that at least to my knowledge no J-REITs where liquidated by bank banks but instead forced to merge with stronger J-REITs (this seems to be what happened to NCI).


    Vacancy and rent rates

    Much has been said about the global real estate boom and bust and I think everyone is familiar with the details.


    Our take: In our opinion Japan was not part of this and real estate prices didn’t go up much prior to the crisis in an international comparison. Japan had its real estate boom in the late 80’ and early 90’ and prices have come sharply down since then. We therefore think that this is more cyclical than anything else and that we are early and in the sweet spot of the cycle.


    Japanese interest rates

    J-REIT investors look for yield and compare to government bond yields. Should this comparison start favoring JGBs then J-REITs have an issue.


    Our take: I think we would all like to see some inflation in Japan and we would see it as a positive development. There is, however, also plenty of room for JGB yields to rise as the current dividend yield is so much higher.




    Disclosure: Long UUI, JOI, JHH and NCI
    Tags: VNO, ACC, J-REIT
    Oct 21 12:43 PM | Link | 1 Comment
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