fat prophets report re bjt, page-13

Share Price continues to do well.

From the Intelligent Investor 16th May 2005.

This includes interesting info re the earthquakes.


An attractive portfolio

The trust raised $280m through the issue of $1 shares on 4 April, to be invested in a portfolio of Japanese properties. It will initially own a portfolio of 12 properties in Greater Tokyo—four retail and eight commercial—although that number, and the number of units on issue, is bound to grow significantly over the years. The properties are 97% tenanted and they appear to be of decent quality. And the fees are reasonable, capped at a maximum of 1% per year. The trust is forecast to pay distributions totalling 8.7 cents for the year to 30 June 2006, which equates to a forecast yield of 7.8%. And a foreign tax credit to offset the withholding tax paid in Japan could add more than 1% to that yield, depending on your individual circumstances. That looks pretty good to us, as it did to Babcock & Brown and its staff, who took up more than 10% of the stock in the float.

But what are the risks? Firstly, as a trust investing offshore, there’s significant exposure to movements in exchange rates between the Aussie dollar and the Japanese yen. We don’t pretend to be experts on the topic but, given the thrifty ways of Japanese citizens and the spendthrift ways of Australians, we’d guess that the Australian dollar will decline over time. But if that doesn’t prove to be the case, it will hurt unitholders.

Another major risk is debt. With $265m in debt and even more ‘off balance sheet’, the net debt-to-equity ratio is approaching 100%. That’s more than we’re generally prepared to accept in a property trust. But even that doesn’t compare with what we see as the biggest risk—earthquakes.

Bill Bryson, in his book A short history of nearly everything, explains: ‘Tokyo stands at the meeting point of three tectonic plates in a country already well known for its seismic instability.’ Tokyo suffered a devastating earthquake in 1923, which killed 200,000 of its then population of 3 million. The city has since been ‘eerily quiet, so the strain beneath the surface has been building for eighty years. Eventually it is bound to snap.’ In fact, Bill McGuire, a hazards specialist at the University of London, describes Tokyo as a ‘city waiting to die’.

Now we don’t want to scare anyone unnecessarily, and we obviously hope that disasters give Tokyo, and everywhere else for that matter, a wide berth. But if you’re making investments you have to think about these things, and we can’t help thinking that this is a situation where some geographic diversity wouldn’t go astray.

If the trust had assets spread all over Japan, then we might still consider it. But, with all 12 properties in and around Tokyo, the risk is highly concentrated. So it was with a keen eye that we searched for the caveat, eventually found on page 30 of the prospectus, regarding earthquakes. ‘There are … certain types of losses that are uninsurable or not generally insured against because it is not economically feasible to insure against such losses.’ These include ‘natural phenomena such as earthquake’. ‘Earthquake insurance will not generally be maintained on the properties.’

Sadly, we think there might be good reasons why it’s ‘not economically feasible’ to insure buildings against earthquakes in Tokyo. Combine this with the high debt burden and, in the wrong circumstances, this is a property trust that could go bust—not a fact you’re likely to read in the prospectus. While the high yield goes some way to compensating for that risk, we don’t think it goes far enough. If B&B Japan units were to fall significantly below the stated net tangible assets of 96 cents, we might reconsider. But, for now, we recommend that you AVOID it.