Overview: Astro Japan Property Group (“Astro Japan”, ‘the Group”) is an investment vehicle focused on the Japan real estate market. It currently holds interests in a portfolio comprising 36 retail, office, and residential properties, of which 80 percent are situated in central and greater Tokyo. After encountering balance sheet issues for the past five years, we initiate coverage for its turnaround potential.
Catalysts: Completion of refinancing initiatives post June 30th are expected to see Astro Japan’s statutory Net Tangible Asset (“NTA”) backing lift from $3.75/sh to $5.59/sh. Reduced interest costs also drive a forecast 20 percent rise in FY14 distributions to 20c/sh. With the Group witnessing valuation gains in its portfolio for the first time since 2008, emerging stability within the Tokyo property market could narrow Astro Japan’s NTA discount. Every one percent change in portfolio value impacts NTA by two percent.
Hurdles: NTA discount stems from ten consecutive half-year periods of valuation contractions within Astro Japan’s portfolio, and a two-decade trend of declining national urban land values. Whilst borrowings now stand at manageable levels, debt servicing consumes a significant proportion of operating income, constraining distribution payouts. With cancellable leases making up 47% of income, distribution stability is not assured.
Investment View: Government initiatives to reinflate Japan’s economy could alleviate two decades of structural real estate market declines. Astro Japan is positioned to benefit after rationalising its portfolio and recapitalising its balance sheet. Attracted to its income profile and capital growth potential stemming from a 35 percent discount to NTA, we initiate coverage with a ‘buy’ recommendation.
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