16th Mar 2009 09:28
JAPAN RESIDENTIAL INVESTMENT COMPANY LIMITED ("THE COMPANY")
Consolidated Financial Statements for the Year Ended 30 November 2008
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 2008.
HIGHLIGHTS
Property portfolio increased to 54 properties with a value of ¥38.21 billion (£261.7 million) as at 30 November 2008. There have been no new purchases since the balance sheet date and there are no pending purchase commitments.
Values on properties held at the beginning of the year had declined 9.7% as at 30 November 2008. Properties purchased during the financial year declined 4.9% by year end. In total, property values fell 9.6% during the financial year. As at year end, capital value of properties had declined 4.7% from the initial purchase price excluding acquisition costs.
New property acquisitions totalled ¥13.83 billion during the year. Secured additional ¥15.00 billion (£102.7 million) in debt financing resulting in total debt of ¥25.25 billion (£172.9 million) at the end of the financial year.
Occupancy reached 94.2% at year end, up 6.8% from the rate as at 30 November 2007.
NAV per share 115.2p at 30 November 2008 (123.3p per share based on exchange rate at 10 March 2009).
An interim distribution of 1.5p per share was paid on 30 June 2008. An additional distribution was made post balance sheet of 1.5p per share on 31 December 2008.
Note: £ denominated values based on the exchange rate of ¥146.001/£ for assets already acquired as at the balance sheet date. Post balance sheet amounts are converted at ¥136.387/£ the exchange rate as at 10 March 2009.
16 March 2009
For further information on the Company, please refer to the website, www.jricl.com, or contact:
K.K. Halifax Asset Management
Alec Menikoff
+81 (0)3 5563 8771
Fairfax I.S. PLC
John Korwin-Szymanowski
+44 (0)20 7460 4376
Smith & Williamson Corporate Finance Limited
Azhic Basirov
+44 (0)20 7131 4000
CHAIRMAN'S STATEMENT
I am pleased to present the Annual Report and Consolidated Financial Statements for the year ended 30 November 2008. The operating performance of the Fund's underlying portfolio, excluding impact of fair value changes, improved steadily during the year despite a tumultuous business climate.
The net asset value ("NAV") per share was 115.2p at 30 November 2008 compared to 90.7p at 30 November 2007 (123.3p per share based on exchange rate at 10 March 2009). NAV benefited from a 35.9% appreciation in the Japanese Yen versus Sterling during the year.
RESULTS
Profit from operations before tax, fair value adjustments, and net foreign exchange losses for the year was £2,323,000 compared to a loss of £1,153,000 in the period ending 30 November 2007. After the downward revaluation of the portfolio by £19,808,000 and foreign exchange losses of £425,000, the loss for the year before tax was £18,006,000 compared with a loss of £1,571,000 for the period ending 30 November 2007.
MARKET
Amidst global credit market turmoil and extreme volatility in equity capital markets, 2008 was a difficult year for Japanese real estate. Lenders increased spreads and scaled back their activity. The shortage of credit pushed several Japanese property sector companies into bankruptcy. Increased funding costs, risk aversion, and market uncertainty have made investors hesitant and resulted in a steep decline in transaction volume. Further disruption in the market is anticipated following an increase of forced property sales in the latter part of 2009 as a rising number of loans breach valuation covenants and investors fail to secure refinancing.
BORROWINGS
As at 30 November 2008, outstanding debt totalled ¥25.25 billion (£172.9 million). In response to declining asset values, the Fund began deleveraging in November 2008 with the pay down of debt in the amount of ¥1.25 billion (£8.6 million). As such, outstanding debt was equal to 72.3% of the value of collateralised properties and had an average total cost of 2.19% per annum on a blended basis. Pay down of an additional ¥250 million (£1.7 million) of debt by Q1 2010 is scheduled.
The next significant refinancing event arises in February 2010 with the maturity of loans totalling ¥3.16 billion (£21.6 million). The Investment Adviser is in discussions for the renewal or replacement of this debt and exploring options for further deleveraging. In light of continued downward pressure on asset values, the Fund intends to protect its cash position to guard against stresses on loan-to-value ratios and to mitigate refinancing risk.
DISTRIBUTIONS
The Fund made its first distribution of 1.5p per share on 30 June 2008. A second distribution of 1.5p per share was made post balance sheet on 31 December 2008. The Board of Directors will continually review distribution policy with due consideration of the Fund's cash position, financing risks, and market conditions. The Board intends to act prudently to conserve cash and pay down debt where feasible, but will balance this priority with the desire to pay distributions when conditions permit. In the current environment, it is not possible to indicate when the next payment will be made.
OUTLOOK
The Japanese property market is overshadowed by credit market turmoil and a global recessionary environment. We anticipate declines in real estate asset values to continue pending a normalisation of the credit markets. The Fund adopted a defensive posture to limit debt exposure with the cessation of new purchase commitments in December 2007.
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.
Given the extent of dislocations in the market, the Fund is fortunate to have maintained significant cash reserves and modest gearing of 49.9%. We are focused on asset management including maximising income, reducing expenditures, and conserving debt and equity capital as a bulwark against precarious market conditions.
Raymond Apsey
Chairman REPORT OF THE MANAGER AND THE INVESTMENT ADVISER
MISSION
The Fund's objective is to generate steady income and capital appreciation resulting in attractive total returns to shareholders. We aim to achieve this through the acquisition and management of quality Japanese residential property in good locations of major cities.
MARKET
2008 was marked by the heightened impact of struggling credit markets on the real estate sector in Japan. Scarcity of credit and reduced investor appetite for risk - trends which accelerated following the collapse of Lehman Brothers in September - contributed to a downward trend in property values.
Upfront fees and spreads on real estate debt financing have increased while loan-to-value ("LTV") ratios and loan tenors decreased. Japanese banks which had a positive stance toward non-recourse real estate lending in early 2008 now face significant capital constraints following steep declines in the value of their equity stock holdings. The capital bases of Japanese lenders have been further pressured by demands from their Japanese multinational clients following weakness in the commercial paper market.
The combination of bank deleveraging and declining asset values has contributed to a string of bankruptcies in the real estate sector and compounded already difficult market conditions. This includes the collapse of three JREIT sponsors (Morimoto, Re-plus, and Creed) and one JREIT itself (New City Residence). Under these circumstances, many purchasers are delaying investment pending improvement in the credit markets or the anticipated spike in bankruptcy and foreclosure-related forced sales in the latter part of 2009. Sellers, convinced that the extreme disruptions in the financial and property markets have caused a dislocation between asset prices and underlying fundamentals, are currently resisting disposing of property.
A substantial gap has emerged between bid and ask prices. Transaction volume is down significantly as potential purchasers remain on the sidelines. This includes JREITs, one of the major drivers of market transactions in recent years. With share prices trading at deep discounts to NAV and difficulty raising debt, JREITs have significantly curtailed purchasing activity.
Property yields are rising as prices decline. According to a widely followed investor survey, market capitalisation rates on residential property increased 70bps yoy - from 4.5% to 5.2% in Tokyo and from 5.5% to 6.2% in both Osaka and Nagoya. To date, market pressures have had more of an impact on transaction volume than on asset values. However, prices on Tokyo pre-owned condominiums are reported to have fallen 6.8% in 2008. The average sales price of new condominiums, which tend to be less sensitive to market conditions, fell 3.1% in Tokyo to ¥59 million in 2008 after increasing 18.9% the year prior. Unsold inventory in Tokyo doubled in 2008 to 4,309 units suggesting that price reductions are not yet sufficient for the market to clear.
The Japanese government has introduced several new measures aimed at supporting the real estate sector. These include an increased mortgage tax credit, a financing programme for real estate developers, and working capital financing for mid-size real estate companies and REITs. In January, it was announced that the Bank of Japan (BOJ) would accept bonds and loans issued to REITs as collateral for loans to financial institutions.
FINANCIAL RESULTS
As a result of property acquisitions and improved performance of underlying assets, Gross rental income increased to £11,172,000 in the year ended 30 November 2008 from £2,484,000 in the prior period. The Fund acquired 19 properties in 2008, all of which had been committed to in 2007. The portfolio occupancy rate rose to 94.2% at fiscal year end 2008 versus 87.4% at 30 November 2007. Property operating expenses fell to 29.9% of Gross rental income, an improvement over the 43.7% expense ratio in the period ending 30 November 2007. As a result, Profit from operations before tax, fair value adjustments, and net foreign exchange losses rose to £2,323,000 in 2008, compared with a £1,153,000 loss in the period ending 30 November 2007.
The Fund reported a Loss for the period of £17,731,000 or 17.73p per share, inclusive of a £275,000 tax credit. The Loss for the period was due mainly to a Net loss from fair value adjustments on investment property of £19,808,000 reflecting property acquisition costs of £3,848,000 as well as a drop in property value of £15,960,000. Net financing costs increased to £3,513,000 from £1,007,000 mainly due to additional interest expense on loans against new property acquisitions.
As a result of new acquisitions, Investment property increased to £261,707,000 at fiscal year end compared to £121,300,000 one year prior. Net loss from fair value adjustments on investment property totalled £19,808,000 in 2008 and was offset by the 35.9% rise of the Japanese Yen against the Sterling from ¥228 as at 30 November 2007 to ¥146 as at 30 November 2008. The effect of exchange rate fluctuations on investment property totalled £92,110,000 as at 30 November 2008. As a result, Net asset value per share increased to 115.2p from 90.7p as at 30 November 2007.
Due to the increase in non-recourse loans drawn down in 2008, Bonds and loans payable increased to £171,424,000 from £49,998,000 as at 30 November 2007. Funds held in lender restricted accounts as reserves against future expenses including interest, taxes, tenant deposits, and insurance - Restricted lender reserves - increased to £6,742,000 from £1,397,000 as at 30 November 2007. With a higher Japanese Yen exchange rate against Sterling, the unrealized exchange translation gain of £41,249,000 was taken to reserve.
Gearing calculated as net debt (borrowings less cash balances and lender restricted reserves) divided by total assets was 49.9% at the end of the financial year. The debt to equity ratio calculated as net debt divided by total equity was 1.26x.
BORROWINGS
The Fund arranged an additional ¥15.00 billion (£102.7 million) in debt financing bringing total outstanding debt to ¥25.25 billion (£172.9 million) at the end of the year. The effect of exchange rate fluctuations on bonds and loans payable totalled £53,026,000 as at 30 November 2008. Debt was secured against 48 properties valued at ¥34.85 billion (£238.7 million) for a total loan-to-value ratio of 72.4%.
The Fund ceased new purchase commitments in December 2007. Deleveraging began in November 2008 with the early redemption of bonds held by ORIX Corporation reducing total borrowings to ¥25.25 billion (£172.9 million). Reduction of a further ¥250 million (£1.7 million) is scheduled to take place in five equal quarterly instalments by Q1 2010.
Debt covenants have maximum LTV ratios of 80% to 85% depending on the lender. Average portfolio LTV headroom (the buffer between current value and the value required to meet LTV covenants) is 11.3%. In light of current market conditions, the Investment Adviser is preparing for the potential breach of LTV covenants sometime in 2009.
Breaches do not necessarily indicate non-compliance with loan covenants. For example for 65% 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. There is greater headroom (19% on average) on the remaining 35% of debt for which consecutive breaches of LTV covenants would result in default.
To avoid default and the resulting acceleration of debt, breaches may be cured through the pro-active partial paydown of debt. The Investment Adviser is considering strategies for the Fund to mitigate possible loan covenant breaches on specific properties that may occur if values continue to fall.
As of 13 March 2009, the blended average remaining duration of the tenor was 2.4 years and the blended interest rate 2.19%. Interest rate hedging strategies have been employed to protect the Fund against significant increases in interest rates. Of the total debt of the portfolio, 35% is fixed rate, 41% floating rate with a cap and 24% floating rate with no cap. Of the total debt executed to date, 37% matures in 2010, 23% in 2011 and 40% in 2012.
NON-RECOURCE DEBT FINANCING AS OF 13 MARCH 2009
|
Amount (Millions of Yen) |
Interest rate |
Final repayment date |
Repayment method |
Note |
|
¥590 |
2.32% |
26 February 2010 |
Bullet payment |
Floating rate, Secured |
|
¥2,570 |
2.24% |
26 February 2010 |
Bullet payment |
Floating rate, Secured |
|
¥6,094 |
1.58% |
29 December 2010 |
Bullet payment |
Floating rate, Secured |
|
¥2,709 |
3.03% |
28 February 2011 |
Bullet payment |
Fixed rate, Secured |
|
¥700 |
3.00% |
25 March 2011 |
Bullet payment |
Fixed rate, Secured |
|
¥246 |
3.09% |
25 April 2011 |
Bullet payment |
Fixed rate, Secured |
|
¥568 |
3.37% |
27 May 2011 |
Bullet payment |
Fixed rate, Secured |
|
¥1,174 |
3.44% |
24 June 2011 |
Bullet payment |
Fixed rate, Secured |
|
¥347 |
3.27% |
29 July 2011 |
Bullet payment |
Fixed rate, Secured |
|
¥4,701 |
1.98% |
27 June 2012 |
Bullet payment |
Floating rate, Secured (1) |
|
¥5,499 |
1.98% |
27 June 2012 |
Bullet payment |
Floating rate, Secured(1) |
|
(1) Fund has negotiated to partly pay down this debt between November 2008 and February 2010 |
||||
PORTFOLIO
The Fund acquired 19 new properties in the financial period bringing the portfolio total to 54. The portfolio was valued at ¥38.21 billion (£261.7 million) as at 30 November 2008 representing a 4.7% decline from initial purchase price of ¥40.10 billion (£274.7 million). During the 12 months ending 30 November 2008, portfolio property valuations fell 9.6%. The unleveraged, Net Yield of the portfolio (projected property-level Net Operating Income over value) is 5.4%.
Sector: All 54 portfolio properties are residential, including some buildings with a minority allocation to retail or office space. The portfolio is comprised of 2,294 rental units with a total net leasable area (NLA) of 74,505 square meters, of which 98% is residential space.
Location: 85% of all properties by value are located in top three markets, with Tokyo (43%), Osaka (28%), and Nagoya (14%). The remaining 15% of properties are located in or within commuting distance to a "key city" with population over 1 million or in a prefectural capital city.
Quality: All buildings have a reinforced concrete structure. Due to 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.
Access: All properties are located within walking distance (most within 10 minutes) of a train or subway station.
Occupancy: All properties in the portfolio have demonstrated strong competitiveness on the leasing front as demonstrated by a portfolio occupancy rate of 94.2% at the end of the financial period.
Building Age: The average age of the portfolio was a young 3.1 years at the year end. However, a full 91% of properties are less than 3 years old, and of those, 25% are less than 1 year old. The low building age of the portfolio is expected to result in lower maintenance and repair costs and greater competitiveness.
Diversification:
Asset Allocation: The Fund is well diversified with the 10 largest assets comprising less than half of total portfolio value. No single asset exceeds 15% of the total portfolio.
Regional Allocation: Assets are well diversified in and around the major population centres of Japan. This includes Tokyo (43%), Osaka (28%), Nagoya (14%), and Other (15%).
Unit-type Allocation: The majority of units, 61%, are Single Type (studio or one bedroom sized up to 40 square meters) targeting the young, single demographic.
TOP 10 INVESTMENTS AS AT NOVEMBER 30TH 2008:
|
Property Name |
City |
Net Yield (1) % |
% of Total Portfolio Value |
|
Spacia Akihabara |
Tokyo |
4.55 |
10.8% |
|
Bravi Minami Horie |
Osaka |
5.44 |
8.1% |
|
Shirogane Takanawa Residence |
Tokyo |
4.82 |
4.2% |
|
Due Stage Shirokanetakanawa |
Tokyo |
5.10 |
3.8% |
|
AH Building |
Nagoya |
5.60 |
3.1% |
|
Motoimaizumi Residence |
Utsunomiya |
6.29 |
3.0% |
|
Hasune Residence |
Tokyo |
5.16 |
2.7% |
|
Alpha Regalo Kobe West |
Kobe |
5.72 |
2.6% |
|
Azabujuban Residence |
Tokyo |
4.90 |
2.5% |
|
Athlete Honmachi River West |
Osaka |
5.29 |
2.2% |
(1) Net yield (FY '09 forecast) on valuation.
OUTLOOK
The Manager expects continued strength in the operating performance of the underlying portfolio. Mass market residential rents and occupancy rates in Japan have been resilient in past market downturns. The Fund portfolio is well diversified, serving growing tenant demand for reasonably priced, quality housing in major markets. Therefore, occupancy rates and operating cash flows are expected to remain strong in the near term. With a portfolio made up of predominantly newer properties, assets are expected to remain competitive. The reduced availability of development finance combined with the departure from the market of numerous residential developers should constrain supply of new product going forward. These factors should mitigate risks posed by an economic downturn.
We are focused on continuous review, control, and where possible reduction of costs. Cost savings are anticipated on the property-level through reduced property management, leasing and professional fees. The Investment Adviser will work to reduce Japan administrative and accounting fees for 2009. Also, to the extent that offshore administrative expenses are Sterling-denominated, they are expected to fall relative to Fund revenues in 2009 due to the stronger yen.
The investment programme relies on a normally functioning credit market. The Manager and the Investment Adviser expect that property prices will continue to fall until there is a recovery in the credit markets. No new investments should be expected until market conditions improve. The Investment Adviser will continue to monitor the debt position closely with a view to maintaining a strong cash position in the event it becomes necessary to cure breaches in loan-to-value covenants that may arise from further declines in asset values. Portions of the outstanding loan book begin to mature in early 2010 with the majority of debt coming due in 2011 and 2012. While we hope credit market turmoil will subside, availability of debt will improve, and asset values recover by that time, we must also consider the possibility that this credit crisis will be protracted. In this context, the selective sale of assets as a means to enhancing cash reserves and reducing refinancing risk may also need to be considered.
|
Consolidated Income Statement |
||
|
For the year ended 30 November 2008 |
||
|
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
Gross rental income |
11,172 |
2,484 |
|
Property operating expenses |
(3,350) |
(1,086) |
|
Net rental income |
7,822 |
1,398 |
|
Acquisition costs of properties purchased |
(3,848) |
(2,675) |
|
Unrealised valuation (loss)/gain on current year/period purchases |
(3,793) |
2,784 |
|
Unrealised valuation loss on properties purchased in prior period |
(12,167) |
- |
|
Net (loss)/gain from fair value adjustments on investment property |
(19,808) |
109 |
|
Administrative expenses |
(2,507) |
(2,071) |
|
Net operating loss before net financing costs |
(14,493) |
(564) |
|
Interest income |
80 |
120 |
|
Interest expense |
(3,072) |
(600) |
|
Net foreign exchange losses |
(425) |
(223) |
|
Loss on fair value adjustments on interest rate cap contracts |
(96) |
(304) |
|
Net financing costs |
(3,513) |
(1,007) |
|
Loss for the year/period before tax |
(18,006) |
(1,571) |
|
Taxation credit/(charge) |
275 |
(355) |
|
Loss for the year/period |
(17,731) |
(1,926) |
|
Loss per share - Basic and diluted |
(17.73p) |
(1.93p) |
|
Consolidated Balance Sheet |
||
|
As at 30 November 2008 |
||
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
Assets |
||
|
Non-current assets |
||
|
Investment property |
261,707 |
121,270 |
|
Interest rate cap contracts |
74 |
132 |
|
Deferred tax asset |
- |
80 |
|
261,781 |
121,482 |
|
|
Current assets |
||
|
Trade and other receivables |
3,900 |
1,557 |
|
Restricted lender reserves |
6,742 |
1,397 |
|
Cash at bank |
19,161 |
18,921 |
|
29,803 |
21,875 |
|
|
Total assets |
291,584 |
143,357 |
|
Liabilities |
||
|
Non-current liabilities |
||
|
Security deposits from tenants |
1,414 |
497 |
|
Bonds and loans payable |
170,054 |
49,998 |
|
Deferred tax liability |
190 |
444 |
|
171,658 |
50,939 |
|
|
Current liabilities |
||
|
Bonds and loans payable |
1,370 |
- |
|
Trade and other payables |
3,397 |
1,263 |
|
Provisions |
- |
482 |
|
4,767 |
1,745 |
|
|
Total liabilities |
176,425 |
52,684 |
|
Net assets |
115,159 |
90,673 |
|
Equity |
||
|
Share capital |
10,000 |
10,000 |
|
Special reserve |
82,067 |
85,067 |
|
Distributions proposed from special reserve |
1,500 |
- |
|
Foreign exchange translation reserve |
41,249 |
(2,468) |
|
Accumulated loss |
(19,657) |
(1,926) |
|
Total equity |
115,159 |
90,673 |
|
Net asset value per share |
115.2p |
90.7p |
|
Consolidated Cash Flow Statement |
||
|
For the year ended 30 November 2008 |
||
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
Cash flows from operating activities |
||
|
Loss for the year/period before tax |
(18,006) |
(1,571) |
|
Adjustments for: |
||
|
Net loss/(gain) on fair value adjustments on investment property |
19,808 |
(109) |
|
Interest income |
(80) |
(120) |
|
Interest expense |
3,072 |
600 |
|
Loss on fair value adjustments on interest rate cap contracts |
96 |
304 |
|
Operating profit/(loss) before changes in working capital |
4,890 |
(896) |
|
Increase in receivables |
(2,343) |
(1,557) |
|
Increase in payables, provisions and security deposits from tenants |
2,379 |
2,179 |
|
Increase in restricted lender reserves |
(5,345) |
(1,397) |
|
Net cash outflow from operating activities |
(419) |
(1,671) |
|
Cash flows from investing activities |
||
|
Purchase of investment property |
(68,135) |
(114,097) |
|
Interest received |
80 |
120 |
|
Net cash outflow from investing activities |
(68,055) |
(113,977) |
|
Cash flows from financing activities |
||
|
Proceeds from issue of ordinary share capital |
- |
100,000 |
|
Share issue costs |
- |
(4,933) |
|
Proceeds from bonds and loans received |
68,400 |
49,998 |
|
Redemption of bonds payable |
(8,613) |
- |
|
Purchase of interest rate cap contracts |
- |
(436) |
|
Distributions paid from special reserve |
(1,500) |
- |
|
Interest paid |
(2,882) |
(537) |
|
Net cash inflow from financing activities |
55,405 |
144,092 |
|
Net (decrease)/increase in cash at bank |
(13,069) |
28,444 |
|
Cash at bank at beginning of year/period |
18,921 |
- |
|
5,852 |
28,444 |
|
|
Effect of exchange rate fluctuations on cash at bank |
13,309 |
(9,523) |
|
Cash at bank at end of the year/period |
19,161 |
18,921 |
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.
The comparative information for the period ending 30 November 2007 relates to the period from date of incorporation, 15 September 2006, to 30 November 2007.
These financial statements were approved for issue by the Board of Directors on 13 March 2009.
Summary of significant accounting policies
2. Basis of preparation
The consolidated financial statements of the Fund have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted for use in the European Union and IFRIC Interpretations that remain in effect, and The Companies (Guernsey) Law, 2008.
3. Going concern
Having made appropriate enquiries, and bearing in mind the nature of the Fund's business and assets, the Directors have reasonable expectation that the Fund has adequate resources to continue in operational existence for the foreseeable future. The Directors have taken into consideration the following key business risks and uncertainties:
- the Fund's cash position and income generating capacity from operations and asset sales;
- potential breaches of certain loan financial covenants if there are continued reductions in property valuations; and
- pending refinancing events in February 2010.
Having taken into account these risks and uncertainties, the Directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements.
4. Gross rental income
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
Gross lease income |
10,618 |
2,324 |
|
Service and management charges |
554 |
160 |
|
11,172 |
2,484 |
The Fund leases out its investment property under operating leases. All operating leases are for terms of two years or more.
The future aggregate minimum rentals receivable under operating leases are as follows:
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
No later than 1 year |
14,329 |
6,128 |
|
Later than 1 year and no later than 5 years |
9,752 |
6,250 |
|
24,081 |
12,378 |
5. Property operating expenses
All property operating expenses relate to investment properties that generated rental income.
6. Administrative expenses
|
2008 |
2007 |
|
|
|
£'000 |
£'000 |
|
Investment advisory fees |
990 |
392 |
|
Administration fees |
589 |
339 |
|
Professional fees |
175 |
215 |
|
Directors' remuneration and expenses |
170 |
144 |
|
Auditors' remuneration |
167 |
89 |
|
Financial advisory fees |
55 |
48 |
|
Management fees |
46 |
64 |
|
Printing and advertising |
44 |
18 |
|
Other |
271 |
291 |
|
Legal claims provision |
- |
471 |
|
2,507 |
2,071 |
Auditors' remuneration relates entirely to the provision of audit services. In addition Ernst & Young earned the following fees during the year/period:
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
Reporting accountants' fees on listing |
- |
15 |
|
Tax advisory services |
64 |
301 |
|
Services as nominated adviser |
- |
171 |
|
64 |
487 |
7. Taxation credit/(charge)
The Company is exempt from Guernsey taxation on income derived outside of Guernsey and bank interest earned in Guernsey under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. 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 Company's subsidiaries are subject to foreign tax on income arising from distributions and interest payments 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.
The Fund is liable to Dutch tax arising on activities of its Dutch operations.
|
The tax credit/(charge) for the year/period comprises:- |
2008 |
2007 |
|
£'000 |
£'000 |
|
|
Decrease/(Increase) in deferred tax liability |
367 |
(433) |
|
(Decrease)/Increase in deferred tax asset |
(92) |
78 |
|
Income tax credit/(charge) |
275 |
(355) |
The credit/(charge) for the year/period can be reconciled to the loss per the consolidated income statement as follows;
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
Loss before tax |
(18,006) |
(1,571) |
|
Tax credit on ordinary activities at applicable country rate (see below) |
7,318 |
306 |
|
Factors affecting charge |
||
|
Tax rate differences on fair value adjustments |
- |
161 |
|
Tax rate differences on deemed distributions |
385 |
(114) |
|
Expenses not deductible for tax purposes |
(7) |
(198) |
|
Timing difference on fair value losses not recognised |
(6,565) |
- |
|
Tax losses not recoverable |
(856) |
(510) |
|
Tax credit/(charge) |
275 |
(355) |
The applicable country rate above is a blended rate of those applicable in different jurisdictions, weighted by the profits and losses arising therein.
8. Loss per share - basic and diluted
|
2008 |
2007 |
|
|
£ |
£ |
|
|
The calculation of the loss per share is based on the following data: |
||
|
Loss attributable to the shareholders of the Company |
17,731,000 |
1,926,000 |
|
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.
9. Investment property
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
At beginning of year/period |
121,270 |
- |
|
Properties purchased |
64,287 |
111,422 |
|
Acquisition costs of properties purchased |
3,848 |
2,675 |
|
68,135 |
114,097 |
|
|
Acquisition costs of properties purchased |
(3,848) |
(2,675) |
|
Unrealised valuation (loss)/gain on current period purchases |
(3,793) |
2,784 |
|
Unrealised valuation loss on properties purchased in prior period |
(12,167) |
- |
|
Net (loss)/gain from fair value adjustments on investment property |
(19,808) |
109 |
|
Effect of exchange rate fluctuations on investment property |
92,110 |
7,064 |
|
At end of year/period |
261,707 |
121,270 |
The total cost of the Investment properties held at the balance sheet date was £289.4 million (¥42.2 billion) (2007: £121.1 million (¥27.6 billion).
Investment property comprises a number of residential properties that are leased to third parties under operating leases. The fair value of the Fund's investment property at 30 November 2008 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 capitalization method which applies a market capitalization 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 £238.7 million (2007: £67 million) of its investment property as security for bonds and loans payable. 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 ratios ranging between 80% and 85% and debt service coverage ratios of between 1.2 and 2.
10. Interest rate cap contracts
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
Fair value at beginning of year/period |
132 |
- |
|
Cap contracts purchased |
- |
436 |
|
Loss on fair value adjustments |
(96) |
(304) |
|
Exchange differences |
38 |
- |
|
Fair value at end of year/period |
74 |
132 |
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 does not exceed 4% during the life of the bonds issued to ORIX Corporation.
11. Deferred tax assets and liabilities
|
Deferred tax assets |
Deferred tax liabilities |
Total |
|
|
2008 |
£'000 |
£'000 |
£'000 |
|
At beginning of year |
(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 year |
- |
190 |
190 |
|
2007 |
|||
|
At beginning of period |
- |
- |
- |
|
Credited/(charged) to the income statement on fair value adjustments on investment properties |
(78) |
227 |
149 |
|
Charged to the income statements on undistributed income and interest payable |
- |
206 |
206 |
|
Exchange differences |
(2) |
11 |
9 |
|
At end of period |
(80) |
444 |
364 |
12. Trade and other receivables
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
Trade receivables |
2,652 |
752 |
|
Other receivables |
1,248 |
805 |
|
3,900 |
1,557 |
All receivables are under 90 days.
13. Restricted lender reserves
The restricted lender reserves comprise bank deposits that are held in lender restricted accounts and are held as reserves against future expenses including interest, taxes and insurance.
14. Cash at bank
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
Current account balances |
19,161 |
18,921 |
15. Bonds and loans payable
|
Principal |
||||
|
Final repayment |
outstanding |
2008 |
2007 |
|
|
¥'000,000 |
£'000 |
£'000 |
||
|
Current |
||||
|
Variable rate interest with cap at 4% |
||||
|
ORIX Corporation |
November 2009 |
200 |
1,370 |
- |
|
Non current |
||||
|
Variable rate interest with no cap |
||||
|
Mizuho Corporation |
December 2010 |
6,014 |
41,196 |
- |
|
Variable rate interest with cap at 4% |
||||
|
ORIX Corporation |
June 2012 |
9,982 |
68,372 |
49,998 |
|
Fixed rate interest |
||||
|
Mizuho Trust & Banking Corporation |
February 2010 |
2,537 |
17,373 |
- |
|
Mizuho Trust & Banking Corporation |
February 2010 |
580 |
3,973 |
- |
|
Tokyo Star Bank Limited |
February 2011 |
2,695 |
18,460 |
- |
|
Tokyo Star Bank Limited |
March 2011 |
696 |
4,770 |
- |
|
Tokyo Star Bank Limited |
April 2011 |
245 |
1,676 |
- |
|
Tokyo Star Bank Limited |
May 2011 |
565 |
3,870 |
- |
|
Tokyo Star Bank Limited |
June 2011 |
1,168 |
8,000 |
- |
|
Tokyo Star Bank Limited |
July 2011 |
345 |
2,364 |
- |
|
24,827 |
170,054 |
49,998 |
||
|
25,027 |
171,424 |
49,998 |
The bonds and loans payable are secured by certain investment properties with a fair market value of ¥34,846 million (£238.7 million) (2007: ¥15,407 million (£68 million)) at the balance sheet date.
On 20 November 2008 the Fund redeemed £8.6 million (¥1.25 billion) of the bonds issued to ORIX Corporation. The Fund will further redeem an additional £1.7 million (¥250 million) of the bonds in equal quarterly instalments over 15 months from 20 November 2008. The first instalment was made on 20 February 2009. The maturity date of June 2012 and all other terms for the remaining £68.3 million (¥10 billion) remain unchanged.
16. Trade and other payables
|
2008 |
2007 |
|
|
|
£'000 |
£'000 |
|
Trade payables |
3,008 |
1,107 |
|
Interest payable |
253 |
63 |
|
Other |
136 |
93 |
|
3,397 |
1,263 |
Trade payables are interest free and have settlement dates within one year.
17. Provisions
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
Balance at beginning of year/period |
482 |
- |
|
Charged to income statement |
- |
471 |
|
Utilized during the year/period |
(514) |
- |
|
Exchange differences |
32 |
11 |
|
Balance at end of year/period |
- |
482 |
On 24 July 2008 the Fund agreed to a settlement of the GK Aegis litigation with the plaintiff. The agreed settlement amount was ¥110 million (£514,000) paid on 30 July 2008 to cover all claims made.
18. Share capital
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
Issued share capital: |
|
|
|
Balance at beginning of year/period |
10,000 |
- |
|
100 million ordinary shares of 10p each issued and fully paid |
- |
10,000 |
|
Balance at end of year/period |
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.
19. Share premium
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
Balance at beginning of year/period |
- |
- |
|
Premium arising on issue of ordinary shares |
- |
90,000 |
|
Transaction costs on issue of ordinary shares |
- |
(4,933) |
|
Conversion to special reserve |
- |
(85,067) |
|
Balance at end of year/period |
- |
- |
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. The amount cancelled has been credited to the special reserve which is distributable.
20. Special reserve
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
Balance at beginning of year/period |
85,067 |
- |
|
On conversion from share premium |
- |
85,067 |
|
Distribution paid |
(1,500) |
- |
|
Distribution proposed |
(1,500) |
- |
|
Balance at end of year/period |
82,067 |
85,067 |
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.
21. Distributions from special reserves
|
2008 |
2007 |
|
|
£'000 |
£'000 |
|
|
Interim distribution of 1.5p per share paid on 30 June 2008 |
1,500 |
- |
A further interim distribution of 1.5p per share (Total: £1,500,000) was declared on 4 November 2008 and paid to shareholders on 31 December 2008.
22. Commitments
The Fund did not have any capital commitments at the balance sheet date (2007: ¥1,421 million (£6.2 million)).
23. Contingent liabilities
The Fund is involved in litigation arising in the ordinary course of business. In the Directors' opinion any likely settlement or recovery will not be material.
24. Related party transactions
Transactions between the Company and its subsidiaries which are related parties have been eliminated on consolidation and are not disclosed in this note.
Directors' fees have been disclosed in the Directors' report. There were no outstanding fees to Directors at the end of the year. There are no key personnel other than the Directors, Investment Adviser and Manager.
The Fund pays fees to KKHML for its management services. The total charge to the income statement during the year was £46,000 (2007: £64,000), of which £12,500 (2007: nil) was outstanding at the end of the year. Paul Hammerstad, a director of the Company, is also a director of KKHML.
The Japan-domiciled firms in which the Company is the ultimate beneficiary pay fees to KKHAM for its investment advisory services. The total charge to the income statement during the year was £990,000 (2007: £381,000) of which £25,320 (2007: £12,114) was outstanding at the period end. Paul Hammerstad, a director of the Company, is also a director of KKHAM.
25. 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% |
26. Post balance sheet events
On 31 December the Fund paid a distribution of 1.5p per share (Total: £1,500,000).
On 20 February 2009 the Fund redeemed £373,000 (¥50 million) of the bonds issued to ORIX Corporation.
27. Copies of Annual Report and Consolidated Financial Statements
The Financial Statements for the year ended 30 November 2008 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