jpan economy is still #2, page-12

Heron12,

I'm not sure where you are getting some of your figures from. Equity at 30 June 2009 was $213m not $260m. There are also 405m units on issue not 500m.

Now in your example you are issuing units in GJT, that is not how the convertible bond works. The easiest way to think of it is that GJT is just a holding entity which owns 100% of the shares in a Japanese property trust (Japan TK). This is where the bond converts, so GJT will only own 60% of Japan TK. So GJT will have the same amount of units on issue after the conversion, but GJT will have a smaller share of the company which owns all of the property.

So here is how I would calculate the NTA:

Starting equity 16.58B Yen

Less 5% reduction in property values -3.8B Yen

Less capitalising interest on Mezz debt -0.25B Yen

New equity at Japan TK level 12.53B Yen

Convert to AUD $152M over 405m units equals $0.38 per unit. Now this is the NTA that would be shown in the accounts. However it is not a true reflection of the underlying value until you convert the bond. So let's do that:

Japan TK equity 12.53B Yen

Add 1.2B Yen for debt converted to TK equity. New equity 13.73B Yen

Now GJT only holds 60% so GJT's share is 8.23B Yen.

Convert to AUD and you have $100m. Over 405m units is 24.6 cents per unit with a liability to asset ratio of around 85%.

With cap rates sitting at about 6% for the portfolio, with Japan's population reducing and the real possibility of deflation I can still see real downside to the valuations over the coming couple of years. With only 15% to play with on the downside before all equity is wiped out this for me is just not worth the risk.

I also suspect that my analysis is also giving an NTA which is too high as I think that the derivative liability would sit within GJT rather Japan TK. Therefore 40% of it would not dissapear on conversion. The interest on this loan relating to the derivatives is also capitalising which I haven't taken in to account.