Interim Results

4th Aug 2008 16:19



Japan Residential Investment Company Limited ("the Company")

Interim Results

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 unaudited consolidated interim financial results for the six months to 31 May 2008.

HIGHLIGHTS

The Fund-owned portfolio was valued at ¥38.6 billion (£185 million) for the period.

Arranged debt financing totalled ¥25.0 billion (£118.5 million) at the period end.

Occupancy rates rose to 92.0% as at 31 May 2008, an improvement of 4.6% over the fiscal year end.

Property operating costs as a percentage of gross rental income fell to 35% from 44% as at the fiscal year end.

NAV per share 94.6p as at 31 May 2008 (92.2p per share based on exchange rate as at 1 August 2008).

The first interim distribution of 1.5p per share paid on 30 June 2008.

Tighter debt markets are leading to downward pressure on asset valuations as well as potentially attractive new acquisition opportunities.

Note: £ denominated values based on the exchange rate of ¥208.618/£ for assets already acquired as at the balance sheet date. Post balance sheet amounts are converted at ¥214.102/£ the exchange rate as at 1 August 2008.

4 August 2008

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 5408 8784

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 interim report and unaudited consolidated financial statements for the period ended 31 May 2008.

The Fund's objective is to provide investors with stable yield and potential for capital appreciation through investment in Japanese residential property.

I commend the Manager for assembling a portfolio of quality assets in a competitive market and for arranging excellent debt financing at attractive terms despite a pronounced credit crunch. Although events in the credit markets have created a difficult operating environment, the underlying real estate fundamentals remain positive.

Results

The Fund reported a loss of £4,506,000 for the period. This follows a net loss from fair value adjustments on investment property in the amount of £6,127,000 including £3,102,000 of acquisition costs capitalized and £3,025,000 from declines in property value. At the operating level, the Fund registered a profit before tax of £779,000 excluding fair value adjustments and foreign exchange movements. The Fund portfolio was valued at ¥38,630 million (£185 million) as at 31 May 2008. Property values at the end of the interim period represented a 2.0% increase over initial purchase price excluding acquisition costs (a 1.4% decrease including acquisition costs). NAV was 94.6p at period end (92.2p at the exchange rate as at 1 August 2008).

In addition to completing and arranging debt financing for committed properties, the Manager has continued to focus on improving portfolio operating performance. Property operating costs as a percentage of gross rental income fell to 35% for the interim period, an improvement of 9% against the figure at fiscal year end. Properties let well in the period and the portfolio occupancy rate rose to 92%.

Distributions

The Company paid its first interim distribution of 1.5 pence per ordinary share on 30 June 2008. The Board will continue a conservative distribution policy. Subject to unforeseen circumstances, it is expected that the next interim distribution will be paid on 31 December 2008.

Outlook

Since the impact of the credit crunch rippled through the Japanese property market, the pace at which the Fund has entered into new purchase commitments slowed in the first half of this year. Due to tighter availability of credit, more time is now required to arrange debt finance. The scale and speed of recent contractions in the credit markets have been dramatic and have inclined the Fund to adopt a conservative approach to investment and a defensive posture with respect to issues of liquidity and debt finance.

The Investment Adviser is reviewing existing debt arrangements with the aim of optimizing leverage. The ability of the Fund to achieve full investment in the calendar year is contingent on the availability of debt financing as well as the Investment Adviser's ability to identify opportunities with suitable risk adjusted returns in the current market. Under current credit market conditions, it is clear that the loan to value ratios anticipated at the Fund launch are no longer feasible. As a result, the targeted Fund size will need to be scaled down at least until the debt markets improve. Lower leverage will reduce project and inevitably Fund return in the short term.

It is believed that a solid foundation has been laid for achieving the long term objectives of the Company.

Raymond Apsey

Chairman

  REPORT OF THE MANAGER AND THE INVESTMENT ADVISER

Market

The Japanese property sector is experiencing the effects of constricting credit markets. Contraction of the mortgage-backed securities market has caused lenders that originate and securitize debt to scale back their activities. With less competition, lenders are being selective, paying close attention to asset quality, property age and location. Lenders are taking an increasingly cautious approach to the property market insisting on lower loan-to-value ratios, higher spreads, and shorter maturities. Investors unable to meet lender criteria to obtain financing for new acquisitions or refinancing of existing portfolios are forced to cancel purchase commitments or sell assets. Consequently, property yields are rising resulting in downward pressure on portfolio valuations while producing acquisition opportunities at attractive prices.

The market's reassessment of risk and pressure on sellers has resulted in a decrease in residential property prices. Pricing gaps between bid and ask prices are contributing to a reduction in transaction volume as purchasers increase their expected return in light of the difficult market environment and higher financing costs. Basic real estate fundamentals remain favourable. Tenant demand and rental rates are stable for residential properties in major markets. Construction costs continue to rise, increasing obstacles to new supply. Driven by the positive credit spread between property yield and financing costs, investors continue to raise large amounts of equity capital targeting the Japanese real estate market.

Financial Results

Stronger cash flow from the increase in assets under management and improved occupancy in the underlying portfolio enabled the Fund to record profit before taxes of £779,000 excluding a net loss from fair value adjustments and foreign exchange movements. Property operating costs fell as a percentage of gross rental income to 35% from 44% at year end. Further reduction in this cost ratio is expected as portfolio occupancy improves. Due to a softening of the property market, the portfolio registered a loss on valuations as at 31 May 2008. This combined with  new acquisition costs capitalized in the amount of £3,102,000 resulted in a net loss from fair value adjustments on investment property of £6,127,000. Loss for the period before tax in the amount of £5,299,000 was partially offset by a deferred tax credit in the amount of £793,000 but led to a loss for the period of £4,506,000 or 4.5p per share.

Net asset value increased 3.9p to 94.6p per share from 30 November 2007, due largely to favourable exchange rate movement.

Investment Activity

The Fund spent ¥11,862 million (£57 million) to purchase 17 additional properties in the first half of the fiscal year. This resulted in a 52-property portfolio valued at ¥38,630 million (£185 million) as at 31 May 2008, a 2.0% increase over initial purchase price excluding acquisition costs (a 1.4% decrease including acquisition costs). Interim acquisitions included some properties with stabilized cash flow; however, the majority was purchased on completion of construction thereby requiring leasing activities. As a result of a successful leasing programme, the portfolio occupancy rate increased 4.4% during the period to 92.0% as at May-end. This portfolio is estimated to achieve a stabilized net yield over purchase price of 5.1%.

The average age of the portfolio remains a relatively low 2.8 years due to the large proportion of newly completed properties purchased. 94% of the portfolio properties are less than 5 years old. Portfolio allocations by property value as at May-end were as follows: Tokyo (42%), Osaka (29%), Nagoya (14%), and Other (15%). The 5% increase in the Osaka allocation from 30 November 2007 was largely due to the purchase of Bravi Minami Horie, a 121-unit flagship property located in a popular district of central Osaka. 

  REPORT OF THE MANAGER AND THE INVESTMENT ADVISER (continued)

Financing

Additional debt financing in the amount of ¥13,477 million (£64 million) was arranged during the period. This brought the total amount of outstanding debt financing to ¥24,977 million (£118 million) with a blended interest rate of 2.27% and an average loan-to-value ratio of 71.2% as of 31 May 2008. Debt is secured by underlying properties and is non-recourse to the Fund. Of total long-term debt arranged to date, 30% is fixed rate, 46% floating rate with a cap, and 24% floating rate with no cap. 35% of total debt matures in 2010, 22% in 2011, and 43% in 2012. The average remaining duration of the tenor is 3.2 years. Fund gearing calculated as net debt (borrowing less bank balances) divided by total equity was 97% as at 31 May 2008.

Outlook

We are monitoring Fund liquidity closely with a view to prudent management of operating risk and the most appropriate allocation of Fund capital. The global credit crunch and resulting dislocations in the equity and debt capital markets is expected to result in a difficult operating environment over the next 12 to 18 months. During this period, we expect debt and equity capital constraints to place downward pressure on real estate prices. We are reviewing financing arrangements with a view toward optimizing debt structures to afford comfortable debt service coverage and loan-to-value ratios, appropriate interest rate hedging, and the lowest available interest costs.

At the same time, we believe that market conditions will provide the Fund with opportunities to acquire high quality assets at attractive yields. We continue to target the calendar year-end for the Fund to achieve full investment. However, given the tighter credit conditions, we are no longer targeting 75% loan to purchase price on acquisitions as was expected at Fund launch. In light of the current debt market, we consider loan to value targets of 60% to 65% to be realistic. We anticipate the reduced leverage will result in lower project and overall Fund return in the short term.

The full extent of the global credit crunch on the Japanese property market remains unclear. In the long-run, we expect sound investment fundamentals and strong investor appetite for Japanese real estate will overcome current dislocations in the debt and equity markets. We believe the Fund has acquired a portfolio with strong relative value and that significant opportunity remains in the Japanese residential property sector.

KK Halifax Management Limited	KK Halifax Asset Management
Manager	Investment Adviser

  

JAPAN RESIDENTIAL INVESTMENT COMPANY LIMITED

CONDENSED INTERIM CONSOLIDATED INCOME STATEMENT

For the six months ended 31 May 2008

	Notes	1 December 2007 to 31 May 2008 Unaudited £'000	15 September 2006 to 31 May 2007 Unaudited £'000
Gross rental income		4,504	495
Property operating expenses		(1,562)	(263)
Net rental income		2,942	232
Acquisition costs of properties purchased		(3,102)	(1,821)
Unrealised valuation gain/(loss) on current period purchases		196	(721)
Unrealised valuation loss on existing properties		(3,221)	-
Net loss from fair value adjustments on investment property	4	(6,127)	(2,542)
Administrative expenses		(1,053)	(371)
Net operating loss before net financing costs		(4,238)	(2,681)
Interest income		32	98
Interest expense		(1,201)	(13)
Net foreign exchange gains/(losses)		49	(210)
Gain on fair value adjustments on interest rate cap contracts		59	-
Net financing costs		(1,061)	(125)
Loss for the period before tax		(5,299)	(2,806)
Taxation credit	2	793	-
Loss for the period		(4,506)	(2,806)
Loss per share - Basic and diluted		(4.51p)	(2.81p)

All items in the above statement are derived from continuing operations.

The loss is attributable to shareholders of the Company. There are no minority interests.

  JAPAN RESIDENTIAL INVESTMENT COMPANY LIMITED

Condensed Interim Consolidated Balance Sheet

As at 31 May 2008

	Notes	31May 2008 Unaudited £'000	30 November 2007 Audited £'000	31 May 2007 Unaudited £'000
Assets
Non-current assets
Investment property	4	185,171	121,270	73,445
Interest rate cap contracts		204	132	-
Deferred tax asset		550	80	-
		185,925	121,482	73,445
Current assets
Trade and other receivables		1,814	1,557	585
Restricted lender reserves	3	5,109	1,397	-
Cash at bank		22,971	18,921	32,500
		29,894	21,875	33,085
Total assets		215,819	143,357	106,530
Liabilities
Non-current liabilities
Security deposits from tenants		594	497	262
Bonds and loans payable	5	118,457	49,998	-
Deferred tax liability		149	444	-
		119,200	50,939	262
Current liabilities
Trade and other payables		1,500	1,263	550
Bonds and loans payable	5	-	-	20,700
Provisions	6	527	482	-
		2,027	1,745	21,250
Total liabilities		121,227	52,684	21,512
Net assets		94,592	90,673	85,018
Equity
Share capital		10,000	10,000	10,000
Special reserve		83,567	85,067	85,082
Distributions proposed from special reserve	8	1,500	-	-
Foreign exchange translation reserve		5,957	(2,468)	(7,258)
Revenue deficit		(6,432)	(1,926)	(2,806)
Total equity		94,592	90,673	85,018
Net asset value per share		94.6p	90.7p	85.0p

  JAPAN RESIDENTIAL INVESTMENT COMPANY LIMITED

Condensed Interim Consolidated Statement of Changes in Equity

For the six months ended 31 May 2008

	Share Capital Unaudited £'000	Share Premium Unaudited £'000	Special Reserve Unaudited £'000	Distributions Proposed From Special Reserve Unaudited £'000	Foreign Exchange Translation Reserve Unaudited £'000	Revenue Deficit Unaudited £'000	Total Unaudited £'000
At 1 December 2007	10,000	-	85,067	-	(2,468)	(1,926)	90,673
Loss for the period	-	-	-	-	-	(4,506)	(4,506)
Distributions proposed	-	-	(1,500)	1,500	-	-	-
Currency translation differences	-	-	-	-	8,425	-	8,425
At 31 May 2008	10,000	-	83,567	1,500	5,957	(6,432)	94,592

	Share Capital Unaudited £'000	Share Premium Unaudited £'000	Special Reserve Unaudited £'000	Foreign Exchange Translation Reserve Unaudited £'000	Revenue Deficit Unaudited £'000	Total Unaudited £'000
At 15 September 2006	-	-	-	-	-	-
Issue of ordinary share capital	10,000	90,000	-	-	-	100,000
Share issue costs	-	(4,918)	-	-	-	(4,918)
Conversion of share premium account	-	(85,082)	85,082	-	-	-
Loss for the period	-	-	-	-	(2,806)	(2,806)
Currency translation differences	-	-	-	(7,258)	-	(7,258)
At 31 May 2007	10,000	-	85,082	(7,258)	(2,806)	85,018

  JAPAN RESIDENTIAL INVESTMENT COMPANY LIMITED

Condensed Interim Consolidated Cash Flow Statement

For the six months ended 31 May 2008

	Notes	1 December 2007 to 31 May 2008 Unaudited £'000	15 September 2006 to 31 May 2007 Unaudited £'000
Cash flows from operating activities
Loss for the period before tax		(4,506)	(2,806)
Adjustments for:
Net loss on fair value adjustments on investment property	4	6,127	2,542
Interest income		(32)	(98)
Interest expense		1,201	13
Gain on fair value adjustments on interest rate cap contracts		(59)	-
Operating cashflows before changes in working capital		2,731	(349)
Increase in receivables		(257)	(585)
Increase in payables, provisions and security deposits from tenants		96	804
Increase in restricted lender reserves		(3,712)	-
Net cash inflow/(outflow) from operating activities		(1,142)	(130)
Cash flows from investing activities
Purchase of investment property	4	(56,859)	(78,653)
Interest received		32	98
Net cash outflow from investing activities		(56,827)	(78,555)
Cash flows from financing activities
Proceeds from issue of ordinary share capital		-	100,000
Share issue costs		-	(4,919)
Proceeds from bonds and loans received	5	63,746	20,700
Interest paid		(963)	(5)
Net cash inflow from financing activities		62,783	115,776
Net increase in cash at bank		4,814	37,091
Cash at bank at beginning of the period		18,921	-
		23,735	37,091
Effect of exchange rate fluctuations on cash at bank		(764)	(4,591)
Cash at bank at end of the period		22,971	32, 500

  JAPAN RESIDENTIAL INVESTMENT COMPANY LIMITED

Notes to the Condensed Interim Consolidated Interim Financial Statements

For the six months ended 31 May 2008

1.  Basis of accounting

Basis of preparation

The condensed interim financial statements have been prepared in accordance with International Accounting Standard (IAS) 34 "Interim Financial Reporting."

The condensed interim financial statements do not include all the information and disclosures required in annual financial statements, and should be read in conjunction with the Fund's annual financial statements for the year ended 30 November 2007.

Significant accounting policies

The same accounting policies, presentation and methods of computation are followed in these condensed interim financial statements as those followed in the preparation of the Fund's annual financial statements for the year ended 30 November 2007, except for the adoption of new standards and interpretations, noted below. Adoption of these Standards and Interpretations did not have any effect on the financial position or performance of the Fund except some additional disclosures in the year end financial statements in respect of financial instruments and management of capital.

- IFRS 7: Financial Instruments: Disclosures

- Amendment to IAS 1: Capital Disclosures

Segment Reporting

The Directors are of the opinion that the Fund is engaged in a single segment of business being residential investment property and in one geographical area, Japan.

2.	Taxation		1 December 2007 to 31 May 2008 Unaudited £'000	15 September 2006 to 31 May 2007 Unaudited £'000
	Decrease in deferred tax liability		297	-
	Increase in deferred tax asset		496	-
			793	-

3.	Restricted lender reserves
	The restricted lender reserves comprise bank deposits that the fund maintains as part of bonds and loans payable terms which may only be used for restricted purposes.

  

4.	Investment property	1 December 2007 to 31 May 2008 Unaudited £'000	1 June 2007 to 30 November  2007 Audited £'000	15 September 2007 to 31 May 2007 Unaudited £'000
	At beginning of period	121,270	73,445	-
	Properties purchased	53,757	34,590	76,832
	Acquisition costs of properties purchased	3,102	854	1,821
		56,859	35,444	78,653
	Acquisition costs of properties purchased	(3,102)	(854)	(1,821)
	Unrealised valuation gain/(loss) on current period purchases	196	1,473	721
	Unrealised valuation (loss)/gain on existing properties	(3,221)	2,032	-
	Net (loss)/gain from fair value adjustments on investment property	(6,127)	2,651	(2,542)
	Effect of exchange rate fluctuations on investment property	13,169	9,730	(2,666)
	At end of period	185,171	121,270	73,445

5.	Bonds and loans payable
					31 May	30 November	31 May
		Final Repayment	Interest Rate	Principal ¥'000,000	2008 Unaudited £'000	2007 Audited £'000	2007 Unaudited £'000
	Non-current
	Variable rate  interest
	Mizuho Corporation	December 2010	1.69%	6,094	28,825	-	-
	Orix Corporation	June 2012	2.26%	11,500	54,711	49,998	-
	Fixed rate interest
	Mizuho Trust & Banking Corporation	February 2010	2.24%	2,570	12,156	-	-
	Mizuho Trust &  Banking Corporation	February 2010	2.32%	590	2,791	-	-
	Tokyo Star Bank Limited	February 2010	3.03%	2,709	12,814	-	-
	Tokyo Star Bank Limited	February 2011	3.00%	700	3,311	-	-
	Tokyo Star Bank  Limited	April 2011	3.09%	246	1,164	-	-
	Tokyo Star Bank  Limited	May 2011	3.37%	568	2,685	-	-
				24,977	118,457	49,998	-
	Current
	Fixed rate interest
	Orix Trust & Banking Corporation	August 2007	2.07%	5,000	-	-	20,700
				29,977	118,457	49,998	20,700
	The bonds and loans payable are secured by investment properties with a fair market value of ¥35,081 million (£168 million) at the balance sheet date.

  

6.	Provisions
		31 May 2008 Unaudited £'000	30 November 2007 Audited £'000
	At beginning of period	482	-
	Charged to income statement	-	471
	Exchange differences	45	11
	At end of period	527	482

All provisions relate to the GK Aegis court proceedings which have had no material developments in the period. An agreement for settlement was reached with the plaintiff on 24 July 2008 (see note 10).

 

7. Related party transactions

The Directors of the Company received fees for their services. The total charge to the income statement during the period was £56,000 all of which had been paid at the end of the period.

The Fund pays fees to KKHML for its management services. The total charge to the income statement during the period was £24,420 of which £12,500 was outstanding at the end of the period. 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 period was £448,126 of which £26,765 was outstanding at the period end. Paul Hammerstad, a director of the Company, is also a director of KKHAM.

 

8. Distributions

On 28 March 2008 a distribution of £1.5 million (2007: £nil) was declared, and was paid out of the Special Reserve on 30 June 2008.

 

9. Commitments

The Fund has capital commitments of ¥2,851 million (£13.7 million) in respect of investment property purchases contracted for at the balance sheet date.

 

10. Post balance sheet events

On 25 June 2008, the Fund arranged a three year term loan in the amount of ¥1,174 million (£5.63 million) at a fixed interest rate of 3.44%.

On 29 July 2008, the Fund arranged a three year term loan in the amount of ¥347 million (£1.59 million) at a fixed interest rate of 3.27%.

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.

 

ENDIR FKQKDPBKDPFK

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JRIC.L