31st Mar 2010 15:30
JAPAN RESIDENTIAL INVESTMENT COMPANY LIMITED ("THE COMPANY")
Consolidated Financial Statements for the Year Ended 30 November 2009
Japan Residential Investment Company Limited (AIM: JRIC) is a closed-ended Guernsey registered company established to make and hold investments in residential property in Japan. The Company presents its audited consolidated annual financial results for the year ended 30 November 2009.
HIGHLIGHTS
·; Underlying profit* before tax increased to £5.0 million over the year
·; Loss for the year increased to £22.7 million from £17.7 million over the year
·; Annual average occupancy increased to 92.1%, up from 89.8% during the year prior
·; Gearing, calculated as net debt (borrowings less cash balances and lender restricted reserves) divided by total assets was 51.9%
·; Fund property values declined 10.1% during the year
·; NAV fell 19.3% during the year to 93.0p per share (97.4p based on exchange rate at 25 March 2010)
Note: £ denominated values are based on the exchange rate of ¥143.1/£1 for assets acquired as at the balance sheet date. Post balance sheet amounts are converted at ¥136.6/£1 being the exchange rate as at 25 March 2010.
* "Underlying profit" is profit excluding losses from fair value adjustments, foreign exchange and other capitalised items. The Fund uses "underlying business performance" in its internal financial reporting and provides this analysis as additional information.
31 March 2010
Enquiries:
|
K.K. Halifax Asset Management
|
Alec Menikoff |
+81 (0)3 5563 8771 |
|
Smith & Williamson Corporate Finance Limited
|
Azhic Basirov |
+44 (0)20 7131 4000 |
|
Fairfax I.S. PLC
|
John Korwin-Szymanowski Gillian McCarthy |
+44 (0)20 7460 4376 +44 (0)20 7460 4390 |
CHAIRMAN'S STATEMENT
I am pleased to present the Annual and Consolidated Financial Statements for the year ended 30 November 2009. Despite a difficult operating environment, by year end the Fund had posted 18-consecutive months with occupancy rates above 90%, reflecting the considerable resilience of the JRIC portfolio as well as the concerted efforts of the Manager and the Investment Adviser. While the broader economy and the real estate sector in Japan are showing some positive signs, the depth and breadth of the recent downturn would suggest that the road to recovery will not be quick or easy. The Board and the Manager are focused on increasing portfolio revenues, preserving cash, and managing debt to achieve the maximum value to shareholders during the life of the Fund.
Results
The Fund generated a consolidated net loss of £22.7 million for the year ended 30 November 2009. However, underlying profit before tax, which excludes unrealised movements on the revaluation of investments and derivatives, foreign exchange and other capital items, more than doubled to £5.0 million.
Benefitting from sustained high occupancy rates and a larger portfolio, Gross rental income increased 56.5% to £17.5 million during the year. Property operating expenses increased to £4.0 million from £2.9 million in the prior fiscal year. With the help of higher operating income and cost reduction initiatives, Property operating expenses as a percentage of Gross rental income fell to 22.6% during the period, from 26.2% in the prior fiscal year. As a result, Net rental income rose to £13.5 million, an increase of 64.0% year on year.
Unrealised valuation loss on existing properties was £26.7 million (reflecting a decline of 10.1% in the market value of Investment property excluding foreign exchange translation effects during the period). To reduce non-core property holdings and increase cash reserves ahead of pending refinancing events, Alpha Regalo Kamisawa was sold for £3.1 million in September 2009 resulting in a Loss on disposal of investment property in the amount of £535,000.
Administrative and other expenses increased to £4.1 million for the period, from £2.9 million in the year prior due mainly to a stronger yen and the reclassification of property appraisal and entrustment fee items into this category. As a percentage of Net rental income, Administrative and other expenses fell to 30.6% from 35.6% in the year prior.
Loss per share was 22.70p for the year versus 17.73p in the prior period.
Net asset value per share decreased to 93.0p as at 30 November 2009, a decline of 22.2p (19.3%) from 30 November 2008. This movement is attributable to a 22.7p net loss for the period, 1.5p distribution, and a 2.0p foreign exchange translation gain.
Borrowings
Debt scheduled to mature in February 2010 in the amount of ¥3.2 billion (£23.4 million) was successfully refinanced in January with Mizuho Trust Bank. The refinancing represents a repayment of ¥1.3 billion (£9.5 million) of the principal amount of the original loan effectively reducing the loan-to-value (LTV) ratio of the related properties from 74.7% to 43.7% based on property valuations as at 30 November 2009. The refinanced loan is in the amount of ¥1.9 billion (£13.9 million) at a fixed interest rate of 2.25% maturing on 31 January 2014.
Debt in the amount of ¥6.1 billion (£44.6 million) scheduled to mature in December 2010 was refinanced with Mizuho Corporate Bank on 31 March 2010. The new loan for ¥5.2 billion (£38.1 million) matures in December 2013 and has an average interest rate of 2.30% over the life of the loan. An additional ¥5.7 billion (£41.7 million) of debt matures during the 6-month period from February to July 2011. The Investment Advisor is actively engaged in discussions with lenders for the refinancing of this debt.
Outlook
The Fund's weak share price appears in sharp contrast to the strong operating performance of the underlying portfolio. Operating performance over the past 18-months has demonstrated the low volatility and recession resistant character of the portfolio cash flow. Recent asset price declines in Japan have resulted in residential property values near 25-year lows. A slow economic recovery would place continued stress on operating performance. Without underestimating these difficulties, we believe the primary challenge for the Fund in the current environment is managing debt and upcoming refinancing events.
The recent economic turmoil has had a profound impact on the Fund, most clearly in the reduction of debt financing available. To date, the Fund has countered this with proactive management of both sides of the balance sheet including curtailing investment and conserving capital. Recent refinancing confirms that debt can be sourced but at much reduced LTV ratios. We anticipate that, absent further asset sales or a recapitalisation, the requisite deleveraging related to refinancing events in 2011 will require a commitment of substantially all the Fund's remaining discretionary cash reserves. To the extent that utilising Fund resources in this manner helps to minimise the forced sale of assets at what may be at or near the bottom of the market cycle, we believe the allocation of cash to pay down debt is a judicious use of capital.
In light of pending refinancing events, the Board feels it prudent to refrain from making distributions in favour of preserving cash. Any resumption of distributions will be subject to either recovery in portfolio asset values, improvements in the credit markets, restructuring of debt to a sustainable level, restoration of the Fund balance sheet through some form of recapitalisation or a combination of the above. The Board, with the support of the Manager and other external advisers, is exploring potential options including the raising of capital through an issue of new shares. At this time, it is not possible to indicate when distributions will be resumed.
The Board commends the Investment Adviser for the operating performance of the portfolio assembled. Given the quality and diversification of assets as well as the historical track record of the residential sector through economic downturns, this portfolio is expected to be a source of reliable rental income for the foreseeable future.
Raymond Apsey
Chairman
31 March 2010
REPORT OF THE MANAGER AND THE INVESTMENT ADVISER
Mission
The Fund's objective is to generate steady income and capital growth through the acquisition and management of quality Japanese residential properties. The focus of the business over the 12-month period has been on increasing income from the portfolio, reducing operating expenses, and managing the capital position of the Fund in advance of pending refinancing events.
Market
Japan emerged from its worst post-war recession in 2009, a year which saw a 5.0% decline in GDP. The global contraction in trade led to a steep falloff in exports and production, increased unemployment, and wage declines. Deflation has returned and Tokyo's core CPI index fell 1.9% last year. Fiscal stimulus and accommodative measures by the Bank of Japan have helped stabilise the economy. Output is expected to grow approximately 2.0% in 2010. Nevertheless, the economic outlook is clouded by persistent deflation and only moderate growth in production.
The property market is stabilising, but, the timing and magnitude of its recovery remains uncertain. The rate of decline in residential land values is slowing in the six major cities where prices are 65.7% below their peak in 1990. In Tokyo, land values appear to have bottomed out. Capitalisation rates are stabilising, albeit at yields last seen in 2004. Recent declines have pushed residential values back to mid-1980s levels, as is the case with the Japanese stock market.
The withdrawal of developers and lack of development financing over the past two years has resulted in a steep decline in condominium supply. In Tokyo, supply fell 16.8% to 36,376 units in 2009, the lowest level in 17 years. Condominium prices declined 6.4% yoy in Tokyo 23 Wards, a rate which, though significant, appears to have been moderated by the overall short supply.
Transaction volume is increasing but mainly on smaller assets - properties priced below ¥500 million (£3.7 million) - in the residential sector due to the stability of cash flows relative to other sectors. Signalling renewed confidence in the sector, two residential JREITs raised equity capital totalling ¥32.9 billion (£240.8 million) in 2009, primarily to fund new property acquisitions.
It remains a strong "lender's market" for debt financing. Amidst increasing loan defaults, lenders remain highly selective - focusing on deals with low leverage, strong sponsors, and newer collateral properties. When financing is available, LTVs range from 50% to 65% of conservative valuations. Most refinancings are subject to substantial debt pay downs to avoid forced sales.
The Manager expects the refinancing environment to remain challenging. Constraints in the debt markets are resulting in forced sales and weighing heavily on the property market. We expect maturing commercial mortgage backed securities (CMBS) and other non-recourse debt to be the driving force for real estate transactions in 2010.
Portfolio
Portfolio Summary
·; 53 properties
·; 2,249 rentable units (2,234 residential units)
·; Average occupancy rate (FY 2009): 92.1%
·; 73,132 sq m net leasable area (97.7% residential use)
·; Average asset size: ¥638 million (£4.5 million)
·; Average residential unit size: 32 sq m
·; Average monthly residential rent: ¥92,000 (£643)
·; 86.0% of properties located in the top 3 markets: Tokyo, Osaka and Nagoya
The Fund portfolio of 53 income generating residential properties, including some buildings with a minority allocation to retail or office space, was valued at ¥33.8 billion (£236.5 million) as at 30 November 2009. This follows the September 2009 sale of a Kobe asset for ¥450 million (£3.1 million) to reduce non-core holdings and boost the Fund's cash position in light of upcoming refinancing events.
During the period, rents were resilient, occupancy rates stable and collection losses negligible. However, job losses and a trend of tenants downsizing to reduce expenses has resulted in increased tenant turnover placing pressure on rents and occupancy levels. In spite of economic weakness and increased tenant turnover, the average annual occupancy rate increased 2.3% yoy to 92.1%, demonstrating the resilience of the portfolio. Portfolio occupancy ended the period at 91.0%, down from 94.3% the year prior.
Continuing a downward trend, property values fell 10.1% on a like-for-like basis during the year due to an expansion of yields across Japan. This brought the unleveraged Net Yield of the portfolio (appraised net operating income over value) to 5.9% as at 30 November 2009.
Regional Allocation: Assets are well diversified in and around the major population centres of Japan. 86.0% of all properties by value are located in the top three markets: Tokyo (43.3%), Osaka (28.5%) and Nagoya (14.2%). The remaining 14.0% of properties are located in or within commuting distance to a "key city" with population over 1 million or in a prefectural capital city.
Asset Diversification: The Fund is well diversified with the 10 largest assets comprising less than half of total portfolio value. The largest single asset represents 10.6% of portfolio value. Portfolio diversification and liquidity is reflected in the small average property size of ¥638 million (£4.5 million).
Asset Quality: All buildings have a reinforced concrete structure. On account of a variety of characteristics including quality of design, amenities and surrounding environment, they are expected to remain competitive in the marketplace for the foreseeable future. The majority of units, 93.8%, are Single and Compact Type, targeting the young, single demographic.
Tenant Risk: The portfolio offers broad tenant diversification with the largest tenant occupying a mere 1.3% of the Fund's total leasable space. Due to overall tenant quality and third party guarantees on the majority of leases, instances of non-collection of rent have been limited to less than 0.1% of gross rental income.
Affordability: Units are concentrated in mid-level rent markets offering broad tenant affordability and appeal. Average monthly rent on residential units was ¥92,000 (£643) as at 30 November 2009. 88.1% of the rents were below ¥150,000 per month.
Building Age: The average age of the portfolio was a young 4.0 years at the year end. However, a full 90.9% of properties are less than 5 years old and 65.7% are less than 3 years old. The modernity of the portfolio is expected to result in lower repair and maintenance costs, higher probability of renewal and greater competitiveness.
Access: All properties are located within walking distance (most within 10 minutes) of a train or subway station.
Borrowings
Fund debt totalling ¥25.0 billion (£175.1 million) was secured against 48 properties valued at ¥31.3 billion (£218.9 million) for a total LTV of 80.0% as at 30 November 2009. Gearing, calculated as net debt (borrowings less cash balances and lender restricted reserves) divided by total assets was 51.9%. The debt to equity ratio calculated as net debt divided by total equity was 1.52x.
Outstanding debt in the amount of ¥3.2 billion (£23.4 million) was refinanced on 14 January 2010 with Mizuho Trust Bank. The new loan in the amount of ¥1.9 billion (£13.9 million) carries a fixed rate of 2.25% and matures 31 January 2014. This loan has an LTV of 43.7% based on values as at 30 November 2009. On 31 March 2010, the Fund refinanced ¥6.1 billion (£44.6 million) of debt with Mizuho Corporate Bank that was scheduled to mature in December 2010. The new loan in the amount of ¥5.2 billion (£38.1 million) matures 31 December 2013 and has an average interest rate of 2.30% during the life of the loan and an annual amortization requirement of ¥174 million (£1.3 million). This refinancing was achieved using a combination of cash and unencumbered property to reduce the LTV to 61.9% based on valuations as at 30 November 2009. A further ¥5.7 billion (£41.7 million) of loans with Tokyo Star Bank mature in the six-month period between February and July 2011. The investment Advisor is currently in discussions regarding the refinancing of this debt.
As of 28 February 2010, Fund debt totalled ¥23.7 billion (£173.5 million) resulting in an LTV of 75.6% based on year-end valuations. The blended average interest rate was 1.95% and average remaining tenor was 21.3 months. Of the total debt, ¥6.1 billion (25.7%) matures in 2010, ¥5.7 billion (24.3%) matures in 2011, ¥10.0 billion (42.2%) matures in 2012 and ¥1.9 (7.8%) matures in 2014.
There are currently no breaches in lender LTV or debt service coverage ratios. However, declines in asset values have led to reduced headroom - the buffer between appraised value and lender mandated minimum property value. Asset value declines could lead to breaches of LTV covenants resulting in a trapping of cash by the lenders. As at 31 March 2010, for 66.7% of the outstanding debt, LTV breaches do not constitute an event of default but rather lead to a trapping of surplus cash generated by the underlying properties which may then be applied to pay down debt until the breach is cured. For 33.3% of the outstanding debt, consecutive breaches of LTV covenants constitute an event of default and could result in an acceleration of the debt.
Third party appraisal values of properties suggest potential LTV covenant breaches in 2 of 10 outstanding debt portfolios. Based on year-end valuations, the capital pay down amount required to cure these potential breaches is estimated at ¥332 million (£2.4 million). In each of these two portfolios, consecutive breaches could lead to a trapping of cash by the lender, but would not constitute a default event.
In light of reduced headroom following asset value declines, the Investment Advisor has arranged for a voluntary partial pay down of debt outstanding with Tokyo Star Bank. The Fund will use cash to pay down ¥330 million (£2.4 million) in outstanding debt and reduce the LTV ratio on the combined Tokyo Star Bank portfolio from 76.6% to 72.2% based on valuations as at 30 November 2009. This pay down will be effective on 30 April 2010.
In order to bring the NAV reporting frequency in line with the market standard for AIM listed property funds, and to reduce valuations costs, the Fund will change its NAV reporting schedule from quarterly to semi-annual. Beginning with the interim period for the six months ending 31 May 2010, NAV announcements will be limited to interim and fiscal year-end values.
Outlook
To date the portfolio has shown resilience to the economic downturn in terms of both occupancy and rent levels. There are signs that property values are stabilising as both the rate of decline of land values and the expansion of investment yields slows. At the same time, real estate loan defaults are increasing on both CMBS and balance sheet debt.
Although announcements of new equity capital allocations to Japan real estate by various institutional investors continue, it is not clear that the overall equity supply will be sufficient to support prices against the potential wave of forced sales. Nevertheless, due to the strong underlying real estate fundamentals for residential property in Japan - that have to date allowed the Fund to maintain a strong operating performance - we remain cautiously optimistic about the near term prospects for a rebound in asset values, and bullish on the long term potential in this sector.
|
Consolidated Income Statement |
|
|
|
|
For the year ended 30 November 2009 |
|
|
|
|
|
Notes |
2009 |
2008 |
|
|
|
£'000 |
£'000 |
|
Gross rental income |
3 |
17,480 |
11,172 |
|
Property operating expenses |
4 |
(3,954) |
(2,925) |
|
Net rental income |
|
13,526 |
8,247 |
|
|
|
|
|
|
Loss on disposal of investment property |
|
(535) |
- |
|
|
|
|
|
|
Acquisition costs of properties purchased |
|
- |
(3,848) |
|
Unrealised valuation loss on current year purchases |
|
- |
(3,793) |
|
Unrealised valuation loss on properties purchased in prior years |
|
(26,736) |
(12,167) |
|
Net loss from fair value adjustments on investment property |
8 |
(26,736) |
(19,808) |
|
|
|
|
|
|
Administrative and other expenses |
|
(4,137) |
(2,932) |
|
|
|
|
|
|
|
|
|
|
|
Net operating loss before net financing costs |
|
(17,882) |
(14,493) |
|
|
|
|
|
|
Interest income |
|
20 |
80 |
|
Interest expense on bonds and loans payable |
|
(4,402) |
(3,072) |
|
Net foreign exchange losses |
|
(141) |
(425) |
|
Loss on fair value adjustments on interest rate cap contracts |
|
(73) |
(96) |
|
Net financing costs |
|
(4,596) |
(3,513) |
|
|
|
|
|
|
Loss for the year before tax |
|
(22,478) |
(18,006) |
|
|
|
|
|
|
Taxation (charge)/credit |
6 |
(223) |
275 |
|
|
|
|
|
|
Loss for the year |
|
(22,701) |
(17,731) |
|
|
|
|
|
|
Loss per share - Basic and diluted |
9 |
(22.70p) |
(17.73p) |
|
Consolidated Balance Sheet |
|
|
||
|
As at 30 November 2009 |
|
|
||
|
|
|
Notes |
2009 |
2008 |
|
|
|
|
£'000 |
£'000 |
|
Assets |
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
Investment property |
8 |
236,493 |
261,707 |
|
|
Interest rate cap contracts |
9 |
1 |
74 |
|
|
|
|
236,494 |
261,781 |
|
Current assets |
|
|
|
|
|
|
Trade and other receivables |
11 |
2,828 |
3,900 |
|
|
Restricted lender reserves |
12 |
6,440 |
6,742 |
|
|
Cash at bank |
13 |
26,364 |
19,161 |
|
|
|
|
35,632 |
29,803 |
|
|
|
|
|
|
|
Total assets |
|
272,126 |
291,584 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
|
Security deposits from tenants |
|
1,171 |
1,414 |
|
|
Bonds and loans payable |
14 |
151,898 |
170,054 |
|
|
Deferred tax liability |
10 |
293 |
190 |
|
|
|
|
153,362 |
171,658 |
|
Current liabilities |
|
|
|
|
|
|
Bonds and loans payable |
14 |
22,267 |
1,370 |
|
|
Trade and other payables |
15 |
3,487 |
3,397 |
|
|
|
|
25,754 |
4,767 |
|
|
|
|
|
|
|
Total liabilities |
|
179,116 |
176,425 |
|
|
|
|
|
|
|
|
Net assets |
|
93,010 |
115,159 |
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
Share capital |
16 |
10,000 |
10,000 |
|
|
Special reserve |
17 |
82,067 |
82,067 |
|
|
Distributions proposed from special reserve |
|
- |
1,500 |
|
|
Foreign exchange translation reserve |
|
43,301 |
41,249 |
|
|
Accumulated loss |
|
(42,358) |
(19,657) |
|
|
|
|
|
|
|
Total equity |
|
93,010 |
115,159 |
|
|
|
|
|
|
|
|
Net asset value per share |
|
93.0p |
115.2p |
|
|
Consolidated Cash Flow Statement |
|
|
|
|
For the year ended 30 November 2009 |
|
|
|
|
|
Notes |
2009 |
2008 |
|
|
|
£'000 |
£'000 |
|
Cash flows from operating activities |
|
|
|
|
Loss for the year before tax |
|
(22,478) |
(18,006) |
|
Adjustments for: |
|
|
|
|
Net loss from fair value adjustments on investment property |
8 |
26,736 |
19,808 |
|
Loss on disposal of investment property |
|
535 |
- |
|
Interest income |
|
(20) |
(80) |
|
Interest expense on bonds and loans payable |
|
4,402 |
3,072 |
|
Loss on fair value adjustments on interest rate cap contracts |
9 |
73 |
96 |
|
Deposit forfeited on uncompleted property transactions |
|
69 |
- |
|
Operating profit before changes in working capital |
|
9,317 |
4,890 |
|
|
|
|
|
|
Decrease/(increase) in receivables |
|
1,072 |
(2,343) |
|
(Decrease)/increase in payables, provisions and security deposits from tenants |
|
(233) |
2,379 |
|
Decrease/(increase) in restricted lender reserves |
|
302 |
(5,345) |
|
Withholding tax paid |
|
(126) |
- |
|
Net cash inflow/(outflow) from operating activities |
|
10,332 |
(419) |
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
Proceeds from disposal of investment property |
|
3,043 |
- |
|
Acquisition costs of properties purchased |
8 |
- |
(68,135) |
|
Property duties paid on property acquisitions in prior year |
8 |
(264) |
- |
|
Capital expenditure |
8 |
(22) |
- |
|
Net cash inflow/(outflow) from investing activities |
|
2,757 |
(68,135) |
|
|
|
|
|
|
Cash flows used in financing activities |
|
|
|
|
Proceeds from bonds and loans received |
|
- |
68,400 |
|
Redemption of bonds payable |
|
(1,374) |
(8,613) |
|
Distributions paid from special reserve |
19 |
(1,500) |
(1,500) |
|
Interest received |
|
20 |
80 |
|
Interest paid |
|
(4,414) |
(2,882) |
|
|
|
|
|
|
Net cash (outflow)/inflow from financing activities |
|
(7,268) |
55,485 |
|
|
|
|
|
|
Net increase/(decrease) in cash at bank |
|
5,821 |
(13,069) |
|
|
|
|
|
|
Cash at bank at beginning of year |
|
19,161 |
18,921 |
|
|
|
24,982 |
5,852 |
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash at bank |
|
1,382 |
13,309 |
|
|
|
|
|
|
Cash at bank at end of the year |
13 |
26,364 |
19,161 |
1. General information
The Fund, which comprises the Company and its subsidiaries and special purpose entities, has been established to make and hold investments in residential property in Japan.
The Company is incorporated and domiciled in Guernsey. The Company has its primary listing on the AIM market of the London Stock Exchange.
These financial statements were approved for issue by the Board of Directors on 31 March 2010.
2. Basis of preparation
The consolidated financial statements of the Fund have been prepared in accordance with International Financial Reporting Standards ("IFRS"), which comprise standards and interpretations approved by the International Accounting Standards Board ('IASB'), and International Accounting Standards and Standards Interpretations Committee, interpretations approved by the International Accounting Standards Committee ('IASC') that remain in effect, to the extent that they have been adopted by the European Union, and The Companies (Guernsey) Law, 2008.
3. Gross rental income
|
|
2009 |
2008 |
|
|
£'000 |
£'000 |
|
Gross lease income |
15,938 |
10,618 |
|
Service and management charges |
1,542 |
554 |
|
|
17,480 |
11,172 |
The Fund leases out its investment property under operating leases. All operating leases are for original terms of two years or more.
The future aggregate minimum rentals receivable under operating leases, as at year end, are as follows:
|
|
2009 |
2008 |
|
|
£'000 |
£'000 |
|
No later than 1 year |
12,537 |
14,329 |
|
Later than 1 year and no later than 5 years |
7,286 |
9,752 |
|
After 5 years |
1,505 |
- |
|
|
24,081 |
24,081 |
4. Property operating expenses
All property operating expenses relate to investment properties that generated rental income.
5. Administrative expenses
|
|
2009 |
2007 |
|
|
£'000 |
£'000 |
|
Investment advisory fees |
1,285 |
990 |
|
Professional fees* |
933 |
439 |
|
Accounting and administrative services |
731 |
589 |
|
Auditors' remuneration** |
318 |
167 |
|
Trustee fees* |
208 |
161 |
|
Directors' remuneration and expenses |
134 |
170 |
|
Management fees |
100 |
46 |
|
Financial advisory fees |
50 |
55 |
|
Other |
378 |
315 |
|
|
4,137 |
2,932 |
Auditors' remuneration relates entirely to the provision of audit services. In addition Ernst & Young earned the following fees during the year, which are included in other expenses:
|
|
|
2009 |
|
2008 |
|
|
|
£'000 |
|
£'000 |
|
Tax advisory services |
|
4 |
|
64 |
|
|
|
|
|
|
* Trustee fees of £161,000 and Appraisal fees of £159,000 currently included in professional fees, has been reclassified for the 2008 financial year from property operating expenses to administrative and other expenses.
**Included in auditors' remuneration is an amount of £82,000 which relates to under accrued audit fees for the 2008 financial year.
6. Taxation (charge)/credit
The Company is exempt from Guernsey taxation on income derived outside of Guernsey and bank interest earned inside Guernsey under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989, as amended. A fixed annual fee of £600 is payable to the States of Guernsey in respect of this exemption. No charge to Guernsey taxation will arise on capital gains.
The Fund's SPEs are subject to foreign tax on income arising from distributions and interest payments originating from Japan. Deferred taxes have been provided on the undistributed profits of the Japanese entities and interest receivable by the subsidiaries at the expected tax rate on the future payments by the Japanese entities.
The fair value adjustments of the investment properties result in a temporary difference between the carrying value of the properties and their tax basis. Deferred taxes on these differences are based on the expected tax rate on the future distributions made on disposal of the investment property.
The Fund is liable to Japanese tax arising on activities of its Japanese operations. Withholding taxes arise on income distributions from the TK's to the TK Investor, J-RIC International Limited.
The Fund is liable to Dutch tax arising on activities of its Dutch operations.
|
The tax credit/(charge) for the year/period comprises:- |
2009 |
2008 |
|
|
£'000 |
£'000 |
|
Decrease/(Increase) in deferred tax liability |
(97) |
367 |
|
Withholding tax suffered on the remittance of retained profit from subsidiaries |
(126) |
- |
|
(Decrease)/Increase in deferred tax asset |
- |
(92) |
|
Income tax credit/(charge) |
(223) |
275 |
The (charge)/credit for the year can be reconciled to the loss per the consolidated income statement as follows;
|
|
2009 |
2008 |
|
|
£'000 |
£'000 |
|
Loss before tax |
(22,478) |
(18,006) |
|
|
|
|
|
Tax credit on ordinary activities at applicable country rate (see below) |
9,229 |
7,318 |
|
|
|
|
|
Tax rate differences on deemed distributions |
322 |
385 |
|
Expenses not deductible for tax purposes |
125 |
(7) |
|
Timing difference on fair value losses not recognised |
(9,079) |
(6,565) |
|
Tax losses utilised |
- |
- |
|
Tax losses not recovered |
(820) |
(856) |
|
Tax credit/(charge) |
(223) |
275 |
The applicable country rate above is a blended rate of those applicable in different jurisdictions, weighted by the profits and losses arising therein.
No deferred tax assets have been recognised in respect of losses due to the unpredictability of future taxable profits.
7. Loss per share - basic and diluted
|
|
2009 |
2008 |
|
|
£ |
£ |
|
The calculation of the loss per share is based on the following data: |
|
|
|
|
|
|
|
Loss attributable to the shareholders of the Company |
22,701 ,000 |
17,731,000 |
|
|
|
|
|
Number of ordinary shares for the purpose of basic and diluted earnings per share |
100,000,000 |
100,000,000 |
The Fund does not have any dilutive potential shares.
8. Investment property
|
|
2009 |
2008 |
|
|
£'000 |
£'000 |
|
At beginning of year |
261,707 |
121,270 |
|
|
|
|
|
Properties purchased |
- |
64,287 |
|
Acquisition costs of properties purchased |
- |
3,848 |
|
Property duties paid on property acquisitions in prior year |
264 |
- |
|
Capital expenditure |
22 |
- |
|
Disposal of properties |
(3,577) |
- |
|
|
(3,291) |
68,135 |
|
|
|
|
|
Acquisition costs of properties purchased |
- |
(3,848) |
|
Unrealised valuation loss on current period purchases |
- |
(3,793) |
|
Unrealised valuation loss on properties purchased in prior period |
(26,736) |
(12,167) |
|
Net loss from fair value adjustments on investment property |
(26,736) |
(19,808) |
|
|
|
|
|
Effect of exchange rate fluctuations on investment property |
4,813 |
92,110 |
|
At end of year |
236,493 |
261,707 |
Property duties are paid once the acquisition of the property has been processed by the Japanese tax office, often this might not be in the same accounting year than the acquisition.
The total cost of the Investment properties held at the balance sheet date was £291.5 million (¥41.7 billion) (2008: £289.4 million (¥42.2 billion)).
Investment property consists of residential properties that are leased to third parties under operating leases. The fair value of the Fund's investment property at 30 November 2009 has been calculated on the basis of valuations carried out at that date by the following independent professionally qualified valuers with relevant recent experience:
Daiwa Real Estate Appraisal Co. Ltd.
DTZ Debenham Tie Leung K.K.
K.K. Tokyo Kantei
The valuation basis has been fair market value as defined by Japanese Real Estate Appraisal Standards calculated using the income capitalisation approach. This approach consists of both the direct capitalisation method which applies a market capitalisation rate to net operating income ('NOI') and the discounted cash flow method which applies a discount rate to both NOI and a forecast terminal property value. NOI is calculated with reference to in place lease contracts as well as monthly reports of actual property income and expenses.
The Fund has pledged approximately £218.9 million (2008: £238.7 million) of its investment property as security for bonds and loans payable (Note 19). Income generated by the pledged investment properties is distributable subject to the Fund meeting its interest obligations on the bonds and loans payable. The bonds and loans payable also include covenants that require maintenance of loan to value ('LTV') ratios ranging between 80% and 85% and "stressed" debt service coverage ratio tests of between 1.2x and 2x.
Any changes in market conditions will directly affect the profit or loss reported through the Income Statement. A 5% increase in the value of the direct properties as at 30 November 2009 would have increased net assets and income for the year by £11.8 million (2008: £13.1 million). A decrease of 5% would have had an equal but opposite effect. It is expected that increases or decreases would be primarily the result of changes in capitalisation rates, the primary variables in the fair value calculations.
9. Interest rate cap contracts
|
|
2009 |
2008 |
|
|
£'000 |
£'000 |
|
Fair value at beginning of year/period |
74 |
132 |
|
Loss on fair value adjustments |
(73) |
(96) |
|
Exchange differences |
- |
38 |
|
Fair value at end of year |
1 |
74 |
The Fund utilises interest rate cap contracts, which are derivative financial instruments, to hedge the interest payments on the bonds issued to ORIX Corporation against movements in Japanese Yen LIBOR rates. The interest rate cap contracts expire on 21 May 2012 and ensure that the Fund's interest cost from bonds issued to ORIX Corporation does not exceed 4%.
10. Deferred tax assets and liabilities
|
|
Deferred tax assets |
Deferred tax liabilities |
Total |
|
2009 |
£'000 |
£'000 |
£'000 |
|
At beginning of year |
- |
190 |
190 |
|
Charged to the income statements on undistributed income and interest payable |
- |
223 |
223 |
|
Utilised on income distributed during the year |
|
(126) |
(126) |
|
Exchange differences |
- |
6 |
6 |
|
At end of year |
- |
293 |
293 |
|
|
|
|
|
|
2008 |
|
|
|
|
At beginning of period |
(80) |
444 |
364 |
|
Credited/(charged) to the income statement on fair value adjustments on investment properties |
91 |
(265) |
(174) |
|
Charged to the income statements on undistributed income and interest payable |
- |
(101) |
(101) |
|
Exchange differences |
(11) |
112 |
101 |
|
At end of period |
- |
190 |
190 |
11. Trade and other receivables
|
|
2009 |
2008 |
|
|
£'000 |
£'000 |
|
Trade receivables |
2,418 |
2,652 |
|
Other receivables |
410 |
1,248 |
|
|
2,828 |
3,900 |
All receivables are under 90 days.
12. Restricted lender reserves
The restricted lender reserves, which belong to the Fund, comprise bank deposits that are held in lender restricted accounts and are held as reserves against future expenses including interest, taxes and insurance. The restricted lender reserves are governed by lender agreements that stipulate the terms under which the borrower may withdraw funds subject to lender approval.
13. Cash at bank
|
|
2009 |
2008 |
|
|
£'000 |
£'000 |
|
Current account balances |
26,364 |
19,161 |
14. Bonds and loans payable
|
|
|
|
Principal |
|
|
|
|
Final repayment |
Interest rate |
outstanding |
2009 |
2008 |
|
Current |
|
¥'000,000 2009 |
£'000 |
£'000 |
|
|
Variable rate interest with cap at 4% |
|
|
|
|
|
|
DB Trust |
February 2010 |
1.32% |
42 |
292 |
- |
|
ORIX Corporation |
February 2010 |
3.37% |
8 |
58 |
1,370 |
|
Fixed rate interest |
|
|
|
|
|
|
Mizuho Trust & Banking Corporation |
February 2010 |
2.24% |
2,552 |
17,834 |
- |
|
Mizuho Trust & Banking Corporation |
February 2010 |
2.32% |
584 |
4,083 |
- |
|
|
|
|
3,186 |
22,267 |
1,370 |
|
Non Current |
|
|
|
|
|
|
Variable rate interest with no cap |
|
|
|
|
|
|
Mizuho Corporation |
December 2010 |
1.39% |
6,053 |
42,308 |
41,196 |
|
Variable rate interest with cap at 4% |
|
|
|
|
|
|
DB Trust |
June 2012 |
1.32% |
8,311 |
58,087 |
- |
|
ORIX Corporation |
June 2012 |
3.37% |
1,642 |
11,475 |
68,372 |
|
Fixed rate interest |
|
|
|
|
|
|
Mizuho Trust and Banking Corporation |
February 2010 |
- |
- |
- |
17,373 |
|
Mizuho Trust and Banking Corporation |
February 2010 |
- |
- |
- |
3,973 |
|
Tokyo Star Bank Limited |
February 2011 |
3.03% |
2,702 |
18,884 |
18,460 |
|
Tokyo Star Bank Limited |
March 2011 |
3.00% |
698 |
4,878 |
4,770 |
|
Tokyo Star Bank Limited |
April 2011 |
3.09% |
245 |
1,713 |
1,676 |
|
Tokyo Star Bank Limited |
May 2011 |
3.37% |
566 |
3,957 |
3,870 |
|
Tokyo Star Bank Limited |
June 2011 |
3.44% |
1,170 |
8,179 |
8,000 |
|
Tokyo Star Bank Limited |
July 2011 |
3.27% |
346 |
2,417 |
2,364 |
|
|
|
|
21,733 |
151,898 |
170,054 |
|
|
|
|
24,919 |
174,165 |
171,424 |
The bonds and loans payable are secured by certain investment properties with a fair market value of ¥31,315 million (£218.9 million) (2008: ¥34,846 million (£238.7 million)) at the balance sheet date.
The Fund redeemed ¥200 million (£1.4 million) of the bonds issued to DB Trust and Orix Corporation during the year. The maturity date of June 2012 and all other terms for the outstanding £69.9 million (¥10 billion) remain unchanged.
The borrowings from DB Trust and Orix Corporation have a tail period of 12 months on the final repayment date.
15. Trade and other payables
|
|
2009 |
2008 |
|
|
£'000 |
£'000 |
|
Trade payables |
2,843 |
3,008 |
|
Interest payable |
241 |
253 |
|
Other |
403 |
136 |
|
|
3,487 |
3,397 |
Trade payables are interest free and have settlement dates within one year of the balance sheet date.
16. Share capital
|
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
Issued share capital: |
|
|
|
100 million ordinary shares of 10p each issued and fully paid |
10,000 |
10,000 |
The total authorised number of ordinary shares is 250 million with a par value of 10p. Ordinary shares carry no right to fixed income but are entitled to dividends as declared from time to time. Each share is entitled to one vote at meetings of the Company.
17. Share premium
On 12 January 2007 the Royal Court of Guernsey confirmed the reduction of the share capital of the Company by way of cancellation of the Company's share premium account. An amount of £85,067 has been credited to the special reserve which is distributable.
18. Special reserve
|
|
2009 |
2008 |
|
|
£'000 |
£'000 |
|
Balance at beginning of year/period |
82,067 |
85,067 |
|
Distribution paid |
- |
(1,500) |
|
Distribution proposed |
- |
(1,500) |
|
Balance at end of year/period |
82,067 |
82,067 |
The special reserve is a distributable reserve to be used for all purposes permitted under Guernsey company law, including the buy back of shares and the payment of dividends.
19. Distributions from special reserves
|
|
2009 |
2008 |
|
|
£'000 |
£'000 |
|
Interim distribution of 1.5p per share paid on 30 June 2008 |
- |
1,500 |
|
Interim distribution of 1.5p per share paid on 31 December 2008 (proposed 4 November 2008) |
1,500 |
- |
|
|
1,500 |
1,500 |
20. Commitments
The Fund did not have any capital commitments at the balance sheet date (2008: Nil).
21. Contingent liabilities
Prior litigation was settled in 2008, currently the Fund is not involved in any litigation.
22. Entities
The Fund consists of the Company and the following entities:
|
|
Entity type |
Country of incorporation |
Beneficial Interest |
|
J-RIC International Limited |
Limited Company |
Guernsey |
100% |
|
JRIC Holdings Limited |
Limited Company |
Guernsey |
100% |
|
JRIC Netherlands Coöperatief U.A. |
Cooperative |
Netherlands |
100% |
|
GK Aegis |
Tokumei Kumiai |
Japan |
100% |
|
GK Cross |
Tokumei Kumiai |
Japan |
100% |
|
GK Daisy |
Tokumei Kumiai |
Japan |
100% |
|
GK Eastern |
Tokumei Kumiai |
Japan |
100% |
|
GK Foster |
Tokumei Kumiai |
Japan |
100% |
|
GK Gordon |
Tokumei Kumiai |
Japan |
100% |
|
GK JRIC |
Limited Liability Company |
Japan |
100% |
|
TMK JRIC1 |
Tokutei Mokuteki Kaisha |
Japan |
100% |
|
TMK JRIC2 |
Tokutei Mokuteki Kaisha |
Japan |
100% |
23. Post balance sheet events
On 14 January 2010, the Fund refinanced ¥3.2 billion (£23.4 million) of its existing debt with Mizuho Trust Bank that was scheduled to mature in February 2010. The refinanced loan is for an amount of ¥1.9 billion (£13.9 million) at a fixed interest rate of 2.25% maturing on 31 January 2014. This refinancing represents a repayment of ¥1.3 billion (£9.5 million) of the principal amount of the original loan resulting in an LTV ratio of 44.7% based on property valuations as at 30 November 2009.
On 22 February 2010, the Fund redeemed ¥50 million (£0.4 million) of bonds issued to DB Trust and ORIX Corporation. This represents the last of five quarterly bond redemptions agreed to in 2008.
On 31 March 2010, the Fund refinanced ¥6.1 billion (£44.6 million) of existing debt with Mizuho Corporate Bank that was scheduled to mature in December 2010. The refinanced loan in the amount of ¥5.2 billion (£38.1 million) matures on 31 December 2013 and has a blended average interest rate of 2.30%. The LTV reduction from 81.3% to 61.9% post-refinancing was achieved with the use of a portion of the Fund's outstanding cash and the pledging of a previously unencumbered property. Loan terms include an annual amortisation requirement in the amount of ¥174 million (£1.3 million).
In light of reduced headroom following asset value declines, the Investment Advisor has arranged for a voluntary partial pay down of debt outstanding to Tokyo Star Bank. Effective 30 April 2010, the Fund will pay down ¥330 million (£2.4 million) in debt thereby reducing the LTV ratio on the combined Tokyo Star Bank portfolio from 76.6% to 72.2% based on valuations as at 30 November 2009.
24. Copies of Annual Report and Consolidated Financial Statements
The Financial Statements for the year ended 30 November 2009 will be sent to shareholders in due course and will be available from the Company's registered office at Sarnia House, Le Truchot, St Peter Port, Guernsey GY1 4NA and on its website www.jricl.com.
Related Shares:
JRIC.L