Friday, July 17, 2015

Recent Action - Accordia Golf Trust

I made a recent purchase of 17,000 shares of Accordia Golf Trust at a price of 64.5 cents

As far as I can remember, I do not have a very good impression of trust that are listed here in SGX. I have made my fair share of loss when I balloted for the IPO for Ascendas Hospitality Trust (AHT) which I then subsequently sold at a loss (link here). Other trusts such as Asian TV have not been performing since its debut as well. For Accordia, they have lost nearly 32% of their value since their IPO at 97 cents. But I will elaborate later on why I think they might represent a value for turnaround play.

Back to the earlier, there are a few common reasons why I think the share price for these trusts have been lingering low since their debut. 

First, most of these trusts have underperformed against the prospectus they have set during the IPO. When the actual performance does not corresponds to the expectations they have set out in the prospectus, there are usually a spiral down of pessimism that kicks in that brings the share price down. Management needs to be aware that they need to set out a realistic prospectus even if the original intention of the underwriter is to raise funds. This includes requisiting for sufficient margin of safety, especially if there are currency and market risks that their assets are exposed to. In this case, AHT, Accordia, FEHT, APPT have all failed to do so in this aspect, which explains the low hanging share price. 

Second, most of these trusts (or Reits) that have been performing poorly have been mostly tied to the economic risk of the country their assets or borrowings are tied to. We have the Accordia from Japan, AHT from Australia, LMIR from Indonesia and Ireit from Germany. These countries have not enjoyed the best of economy in recent times and as a result, their respective central government are utilizing monetary stance that weakens its currency.

As with all companies, the share price might go down to a point which might represent value. I think this case applies to Accordia and the reason why I am now vested in the shares. Here are also some of the other reasons that propel me to invest in the shares:

1.) Freehold Title Deed of the Golf Land Course

This is pretty straightforward. 

If the land title is freehold, then the trusts will theoretically be able to utilize them to infinity. This is favourable to leasehold properties tied to industrial or commercial, who has only 30 to 40 years of lease life. Theoretically speaking, Reits whose assets have a limited number of life will have to constantly source for new assets in order to lengthen their WALE life concession. This is partly the reason why most Reit managers are constantly looking for new assets or extend their current lease concession when it is nearer to maturity. 

If you have a freehold land, then the title will always be yours, perhaps subject to constant maintenance to ensure the stability for use.

2.) Juicy Dividend Yield

I have to be honest that for the most part I am interested in this business mainly for its high dividend yield they are currently offering. I have my reasons though, and I don’t try to do that blindly. 

First, the normalized DPU for the full year excluding the one off is coming in at 6.07 cents/share, which is about 12% off target from the prospectus. This is based on the assumption that the exchange rate from SGD to YEN is at about SGD1: JPY 90.61. 

Assuming the Yen continues to weaken, we might see the JPY coming in at SGD1: JPY100. Should that happens, you can be sure that performance and DPU are going to be impacted. My guestimate is that it will probably happen and DPU will come in nearer to the 5.5 cents/share, which translates into 8.6% based on my purchase price. That is still a very respectable amount of yield we are talking about, given that there isn't any hidden agenda tricks such as the income support other reits are currently using. There is also a high probability that the yield would be boosted given their acquisition agenda which I will talk more in detail below.

3.) Low debt Gearing 

The trusts have a rather conservative gearing rate at around an Loan-To-Value (LTV) of 30.1% (debt/appraisal value). This is rather conservative considering that many other trusts and/or reits have gearing in excess of 40%.

Based on the latest AR, management has guided that they would like to gear up to around 40% to 50% and it even has a plan to acquire up to JPY 50 billion by end of Mar 2017. They also mentioned that in the interests of unitholders, they would only acquire golf course which will boost the trust DPU growth. This is not difficult at the moment as we will see later most of the NOI (Net Operating Income after deducting all maintenance and related expenses) for the existing golf courses are yielding in excess of 10%. 

Gearing of up to an LTV of 40% would mean that the trust can undertake a further debt of JPY 25 billion. This means that the trust can swallow almost 4 times of Daiatsugi Country Club Course, which is the number one highest appraised golf course the trust currently have at JPY 6.6 billion or 6 times of Izumisano Country Club, which is the number two highest appraised golf course the trust currently have at JPY 4.8 billion.

Gearing of up to an LTV of 50% would mean that the trust can undertake a further debt of JPY 40 billion. This means that the trust can swallow almost 6 times of Daiatsugi Country Club Course, which is the number one highest appraised golf course the trust currently have at JPY 6.6 billion or 9 times of Izumisano Country Club, which is the number two highest appraised golf course the trust currently have at JPY 4.8 billion.

4.) Inorganic Growth 

The plans from the management for the next 2 years are crystal clear. 

The trusts have sufficient debt headroom (see above) for further acquisitions and they will add another JPY 50 billion assets injected into the portfolio. Given how the existing assets capitalization capability rate the assets are generating, it should be an easy target for the trusts to inject further similar type of assets into their current portfolio. 

NOI Capitalization Rate %

Just take a look at the NOI yield highlighted and you can be impressed that the existing assets are generating a NOI capitalization rate close to 12.4% on average. This is based on the assumption that the utilization rate is at around 77%. Imagine if the management can ramp up the utilization rate higher and NOI yield should rise even further. Comparing this to a 40 years odd office leasehold (e.g OUE Tower) at a capitalization rate of 4% and you would see how good it is to own a golf business. 

Since the current existing yield is approximately at 8.6% at estimates, this means that any acquisition they make will most likely be accretive to the DPU since first, they will most likely be funding it via debt and second the existing NOI yield > dividend yield. This means that there are potential that the DPU can grow over the next 2 years rather rapidly, assuming they go ahead with the expansion plan.

5.) Catalyst for Olympic 2016 and 2020

After an absence of more than a century, golf as a sport will return as an Olympic event in 2016 and 2020, an event which will bring favorable take up rate for more members to get interested in the sport that will increase the utilization rate for the company.

Tokyo will particularly host the 2020 Olympic, so it'll be interesting to see whether the operations are able to draw larger crowds given that the premises will mostly likely be used to host the event.


Investors should note that there are inherent risks which they need to take note, and to me they represent the biggest risk that I consider:

1.) Currency Risk 

Since the company's operation is based in Japan, there are a direct currency risk especially since reporting and dividends are paid out in Singapore dollar. The japanese yen has not been performing well over the past few years and a depreciation of its currency this year led to the underperformance of the trust compared to the prospectus.

Fortunately for investors, there are the natural hedge between its earnings and borrowings as interest swaps are both done in the japanese yen, so it provides the natural hedge towards currency risk for the assets it owns. Their NAV is still at a respective 87 cents based on the latest results, which put the P/BV currently at 0.74.

Management has guided that they are looking into hedging a part of their currency to the Singapore dollar. A hedging of the currency might costs some money to the trust, but at least it makes performance reporting and budgeting more predictable to everyone.

2.) Natural Disaster Risk 

Earthquake is a common occurrence in Japan and massive natural disaster can be detrimental to the company’s operation which can destroy the golf course as well as its other extended operations in the hotel and f&b segment. From the prospectus, management has guided that it is very difficult to insure the whole assets because of the size of the golf course that does not make it worthwhile for the company to insure the assets for natural disaster protection. As far as earthquake insurance is concerned, they are only insured on the Probable Maximum Loss that would be incurred in excess of 15% of the replacement costs. Anything beyond that will result in material losses borne by the trusts itself. This is similar to China Merchant Pacific who does not insure all of their toll roads because the size makes it impossible to do so. 

For others that are interested to know more, Liberal Hills, Onahama and Miyagino Golf Club were affected by the great earthquake and the resultant nuclear power plant accident which took place in 2011. Even though they did receive some sort of compensation for the loss, you can see how this remains one of the main risks investors need to take note of.

Final Thoughts

There are a lot weighing on investor's mind on how one can operate a golf trust business successfully. The truth is, it is not something that we can have plenty of information to research on other than what is already presented in the AR. As investors, we just need to read between the lines and numbers more discreetly such that we do not miss certain information that might be important for our investing decision. 

The trust is not without the risk as I have rightfully presented both sides of the arguments, but whether or not they represent a value from a risk adjusted return point of view remains the call of an investor. One thing for sure is that the trust is losing investor's interest at the moment given the lackluster first year performance that disappointed badly because mainly of the depreciation of the Yen but you need to decide if that is something permanent that will impact the most part of the earnings for the next few years to come. 

For me, I'll be happy if this can yield somewhere in the range of 8% while my other counters in the portfolio are aiming for more growth. My take is that the decline should be quite overdone and I'll be surprised if I see them continue to slide down hard the way they have been sliding over the past few months. Nothing is impossible though so interested readers should do their own due diligence on the matter. 

What do you think of this trust? Will you be interested to add this into your portfolio?


  1. Hi B,

    I was alerted by a reader that you are also an AGT unitholder now. News travel fast! ;p

    There will be more competition to accumulate AGT on weakness now that you have blogged about it. -.-"

    Welcome to the (golf) club. :)

    1. Hi AK

      Thanks for your comment.

      I was alerted to this share when you blogged about it not too long ago. Unfortunately, the share price has weakened rather rapidly so I was intrigued by what is happening and went in to take a look at it further.

      I saw that you accumulated more recently in the most recent price weakness. Everything else equal, it is indeed getting more attractive now. I think AK readers would have accumulated upon seeing you accumulated even more :). Finger crossed, hope the share would bottom out ;)

    2. Hi B,

      Well, I am quite perverse here. I am actually looking forward to unit price weakening further from here. Next support is at 62c.

      Frankly, I am getting my war chest ready for gobbling if what I have in mind as an unfair offer for AGT should ever come to pass. Could we see unit price go under 60c in the near future? We will have to wait and see, I suppose. ;)

    3. Hi AK

      Ahh i see. I will notr for the 62 cents support since 65 cents support are breached earlier after consolidating for some time.

      It will be interesting to see them going below 60 cents if they do. By then, looks like i will have to find plenty of warchest to add to them as well :)

  2. Hi B

    I seriously don't think JPY can drop a lot more as it is near historical low. SGD is also expected to weakened a little, so it should be proportionate?

    I think your new investment is in good hand with calculated risk. Just hold for a few years and the dividends will reward you handsomely as you have presented above.

    1. Hi Frugal Daddy

      Thanks for your comment.

      I note your point regarding the sgd weakening as well as part of the monetary policy the mas is undertaking, so maybe we will have a similar weakening for both currency which could be a disguise in blessing for agt :)

  3. Hi B

    Wa, With you and AK buying, i don't think I stand a chance.

    There are several land parcels with various issues, although it is indemnified, it is a repurchase promise, the potential loss in income will need to be offset by future acquisitions

    Nonetheless it is very attractive at curernt price indeed

    1. Hi SI

      Looks like it's still on a downtrend.

      Perhaps you want to join in the fun as well? :D

      There are some uncertainty in the revenues which could come in rather lumpy, but I would think unless it's an adverse condition, otherwise it should be able to maintain.

  4. Hi B

    Thanks alot for the write up!
    I am interested in Accordia too, but I have some doubts about the sustainability of the DPU.
    The net profit for 8 months is 2365M yen.
    If we annualize that, it will be 3548M.

    Assuming that they pay out 90% of profits, the distributable income will be 3192M, and DPU is 2.9 yen per share.

    That would translate to a yield of about 5% at current price of 0.64 SGD, assuming current exchange rate of 1 JPY = 0.011 SGD.

    I do understand that business trust pay out of cash flow rather than net profits, but is that sustainable in the long run?
    Despite having freehold courses, they have some depreciation expenses due to the buildings and equipment.

    I am still rather new to investing. Please let me know if my assumptions are wrong.
    Thanks again, and hope to see more of your interesting posts!

    1. Hi Goh

      Yes, you are right, they are paying out the distribution from cash flow rather than net profits. Depreciation is a non-cash items, so they are added back into the cashflow and form part of the cashflow that are distributed as dividends.

      For sustainability of dividends paid out, the important thing to look at is the golf course fees which form the majority part of the revenues. The monthly update sent by AGT is a very useful indication report, as it depicts the utilization rate which states how much increase in members contribute to the corresponding increase in the utilization of the golf course. If the utilization starts to drop massively, that's a flag red to take note.

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  6. Hi B, i have been following your blog for some time now. And i really enjoy reading your post. I have strong interest in Accordia and have been thinking of adding this counter to my portfolio. I might probably add after reading your post. Accordia FTW! Looking to add to my passive income. thanks

  7. This actually answered my downside, thanks right here on this post. I will likely be coming again to your weblog for extra soon.

  8. Are you still holding Accordia?
    Their dividend was disappointing and the price has come down a lot.
    And it seems likely US will raise interest rates.

  9. Author is sitting of a ~ $2000 paper loss on this stock.

    As with most blogs analyzing stock nowadays, most of bloggers neglect to mention the strength of the management; exactly who is/are running the show and what is/are their track records like.

    Instead, we can treated to show on how good the numbers supposedly looks. Well, it could Bozo the Clown running the show and the blogger would still recommend the stock. Enough said

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