ASTRO JAPAN PROPERTY GROUP ASX/Media Release
12 November 2014
AGM ADDRESS TO SECURITYHOLDERS
Please find attached the Address to Securityholders to be delivered by the Chairman and the
Senior Advisor at today's Annual General Meeting.
Eric Lucas John Pettigrew
Senior Advisor Chief Financial Officer
Phone: +61 2 8987 3900 (Australia) Phone: +61 2 8987 3902
+81 3 3238 1671 (Japan)
About Astro Japan Property Group (AJA)Astro Japan Property Group is a listed property group which invests in the Japan real estate market. It currently holds interests in a portfolio comprising 30 retail, office and residential properties. Asset management services in Japan are generally undertaken by Spring Investment Co., Ltd.
AJA is a stapled entity comprising Astro Japan Property Trust (ARSN 112 799 854) and Astro Japan Property Group Limited (ABN 25 135 381 663). For further information please visit our website: www.astrojapanproperty.com.
Good morning and welcome to the Astro Japan Property Group's 2014 Annual General Meeting.
I am pleased to report that the 2014 financial year saw a positive statutory net profit of $154.8 million. This result is largely driven by debt forgiveness of $131.4 million and upward revaluations of the ongoing property portfolio of approximately $12.1 million. We are pleased to see both a positive statutory net profit and full year increase in the value of the ongoing portfolio. It is the first time since 2008 that this has occurred.
Underlying profit after tax for the year of $27.0 million was lower than the prior year although in line with earnings guidance provided to the ASX. This result reflects an 11% decline in net property income to ¥4.8 billion in Yen terms (in Australian dollar terms A$51.9 million, down 14.2%)
primarily due to reduced portfolio size following the sale of properties, the incurrence of a $2.5 million asset management performance fee and an approximately 3% stronger Australian dollar to the Yen. These negatives were partially offset by savings in borrowing costs.
A significant milestone during the 2014 financial year was the stabilisation of the Group's capital structure through a combination of asset sales, debt restructuring, and in particular the large debt forgiveness mentioned earlier. We have seen the completion of the transaction dealing with the loans and interest swaps entered into by JPT Direct Co., Ltd (JPTD) and JPT August Co., Ltd (JPTA), together with a small capital injection and the financing for JPT Omega Co., Ltd (JPTO), all of which resulted in a material reduction in gearing, an increase in NTA and improved cash flows.
With the introduction by the ASX Corporate Governance Council of its third edition of the Corporate Governance Principles and Recommendations with effect from 1 July 2014, a detailed review of the Group's governance framework has been undertaken to ensure compliance with applicable new requirements. Based on that review, the Board determined that the Group was already largely in compliance with the new governance requirements. A small number of the new governance requirements have been adopted by the Board to the Group's governance framework, and we will report on these in the 2015 Corporate Governance Statement.
The Board and the Japan Asset Manager, Spring, continue to seek improvement in the efficiency of capital usage, with particular focus on improving debt terms. We continue to look at opportunities to sell assets where appropriate to improve equity performance. For example, you will have seen the recent announcement of the sale of Aeon Mukomachi, outlining that capital
released from the sale is now available to fund a security buy-back. These matters will be discussed further in the Senior Advisor's address.
Now that we have emerged from the cycle of refinancings of pre-GFC debt, and with improving Japanese property and finance sectors, we have the scope to focus on opportunities to drive improvement in our capital performance.
We remain encouraged by signs of improvement in Japan's economic activity, supported by Prime Minister Shinzo Abe's "third arrow" of his strategy, a broad array of proposed structural reforms that follow the implementation of monetary expansion and fiscal stimulus. This improvement was pronounced until earlier this year but, with the increase in the consumption tax rate in March, has disappointed since then. The recent surprise announcement by the Bank of Japan that it was materially increasing its efforts to expand the money supply, although likely to be positive for the property market, illustrates the recent moderation in the economic picture in Japan. As a result, and given continuing global uncertainty, the Directors continue to remain conservative in their outlook for FY2015 and beyond.
Before moving to the Senior Advisor's address and formal business of the meeting, I would like to thank my Board colleagues and the management team, together with Spring, for their hard work and commitment during the year.
I will now hand over to Eric Lucas, our Senior Advisor, who will provide commentary in relation to the Astro Group's recent developments.
Thank you Allan. Good morning and once again welcome to our 2014 Annual General Meeting.
I will first provide a brief overview of the Group's various capital management initiatives and achievements in the last few months before moving onto our outlook.
Since our Full Year Results release on 27 August 2014, we are very pleased to have completed the refinancings of the ¥12.8 billion senior loan to JPT Co., Ltd. (JPT) and the ¥15.8 billion senior loan to JPT Corporate Co., Ltd. (JPTC), together representing over 60% of AJA debt. The terms of these refinancings are, I believe, very favourable and materially improve the liability side of AJA's balance sheet.
JPT was refinanced with a new 10 year senior loan of ¥13.0 billion (A$134.0 million), and JPTC was refinanced with a new 10 year senior loan of ¥16.2 billion (A$167.0 million). This is the first time AJA has been able to borrow on competitive terms beyond 5 years and we are very pleased to have been able to take advantage of the opportunity to do so.
Although the aggregate interest margins are slightly higher than those in the previous loans, there is a large reduction in the required annual debt amortisation payments, from 10.4 cents per security per annum to zero for the two loans. Amortisation increases after three years for one of the loans and after five years for the other, to a maximum of 5.7 cents per annum in total after five years, which is just over half of the previous level.
The weighted average maturity of the Group's debt has increased to 6.9 years from 2.1 years and
there has also been an increase in the percentage of fixed rate debt to 53% from 26%. This
2
reflects Spring's view that with so much monetary stimulus being undertaken in Japan and globally, the risk on long-term interest rates, which have fallen precipitously to well under 1% in Japan, may well be to the upside.
Even though both loans are from the same lender there is no cross-collateralisation between the two loans.
Two key features achieved in these refinancing negotiations are:
the flexibility to sell assets and/or refinance during the 10 year term, subject to some penalties in early years which, from the fifth year, reduce to zero; and
the new JPT loan is secured over only two of the seven properties held by JPT, which potentially allows for additional future financing of the remaining five properties, which have a combined book value of ¥6.3 billion as at 30 June 2014.
Based upon the cash flow benefits already achieved from the above refinancings, distribution guidance for FY15 was increased from 20 to 25 cents per security.
Shortly following the above refinancing we achieved the sale of Aeon Mukomachi, a retail property situated in the Kyoto area, for ¥3.45 billion (A$35.6 million). AJA's interest in the building was held through JPT Scarlett Co. Ltd (JPTS) and this is the fifth asset sold from the JPTS portfolio in the past 12 months, following the sales of the Sapporo Toys 'R' Us, Prime Stay Tsukiji, Akabane and Daikanyama properties. This asset represented approximately 3.9% of AJA's portfolio by book value at 30 June 2014 and was sold at approximately a 6.8% premium to the 30 June 2014 book value.
After making repayment of approximately ¥2.5 billion of debt principal required to release this asset under the loan agreement and netting against the sale proceeds the payment of loan and sale- related costs, net proceeds available to AJA are approximately ¥878 million (approx. A$9.1 million).
This sale was opportunistic, as the lease to the major tenant Aeon Retail, the second largest individual lease by income in the AJA portfolio, has for some time appeared likely to be cancelled due to the imminent opening by Aeon of a large competitive shopping centre nearby. We believe the sale has materially increased the prospects for a satisfactory refinance of the debt of JPTS, which matures in April 2015. The JPTS refinancing is a major focus for us right now.
As part of our ongoing capital management strategy, at the time we announced the above sale we also announced our intention to undertake an on-market buy-back through to the end of September next year, of up to 3,360,587 stapled securities, representing 5% of AJA's issued capital.
In accordance with ASX listing rules, securities acquired through the buy-back will be purchased on-market at a price no more than 5% above the volume weighted average market price of AJA's securities over the five prior trading days. The total number of securities to be purchased under the buy-back will depend on market conditions and volumes. Although we have already been active in the market, due to light liquidity and an absence of sellers to date we have only purchased 14,364
securities for total consideration of approximately $60,000.
3
The buy-back will be funded from proceeds of recent assets sales, including Aeon Mukomachi, and additional available cash reserves.
Despite having risen substantially over the last 12 months, AJA securities still trade at a material discount to NTA, and the Board therefore considers this to be the preferred use of immediately available cash whilst Spring pursues opportunities for accretive acquisitions.
As the Chairman mentioned, now that we are through the post-GFC refinancing cycle, I think it is worth summarizing what has been achieved in stabilizing the capital structure to preserve shareholder value and how it has been achieved. Since the GFC, AJA has sold nearly $500 million of property - more than 50% of the size of today's portfolio - in order to reduce gearing and enable refinancing of pre-GFC debt with minimal dilutive equity raising. Equity raised during that period, by contrast, totals only about $49 million.
Asset sales, along with the substantial debt forgiveness negotiated as part of the JPTA and JPTD loan restructurings, have been the critical tool in bringing AJA's gearing level down from a peak level of 79% to its current level of 56%, which is comfortably within Astro's target gearing range. Given that we now have the scope to seek ongoing incremental improvement, future asset sales will now focus on portfolio and debt structure optimisation to try to maximise AJA's risk-adjusted leveraged earnings and distributable cash. Smaller, non-strategic assets will continue to be the focus of asset sale efforts, especially where the sales will enhance refinancing prospects.
We intend to use any capital released through refinancing and asset sale initiatives for security
buy-backs, increased distribution, more efficiently leveraged investment, capital return, and/or debt reduction.
With the economic picture having brightened in Japan, we will renew our efforts to maximise operating performance and will continue to do our best to manage your capital prudently.
4
|
distributed by
|
