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Accordia Golf Trust: At what price is it a BUY?

Wednesday, July 30, 2014

Some readers asked me at what price would I be interested in Accordia Golf Trust since I have said that I was not willing to pay the IPO price of 97c a unit, believing that it did not represent good value for money although it promised a 7% distribution yield.

Some asked me if they should start buying once the unit price goes under the NAV per unit of 92c because with its IPO in Singapore just 0.7x subscribed, it could see unit price sinking quite rapidly on the first day of trading.

Of course, I almost never give a clear answer to questions like this.

However, I will say that although it could be nice to buy something below its NAV, when we are investing for income, we really want to see whether the level of income that is being generated is attractive enough and how much of that promised income to be distributed is sustainable.

To do this, I looked into the Trust's gearing. The first observation is the very high gearing level of about 53%. That is similar to Croesus Retail Trust's current gearing level and yet Accordia Golf Trust could only promise a distribution yield of 7%.

Next, I looked at the way its debt has been structured. Long term debt really consists of three term loans of JPY 15 billion each.

The first term loan is for 3 years and the cost? 1.25% +
The second term loan is for 4 years. 1.5% +
The third term loan is for 5 years. 1.75% +

What is that "+" for? Cost of debt is actually a base percentage + the 6 months JPY TIBOR. If you don't know what TIBOR is, it stands for Tokyo Interbank Offered Rate which is forecast to be about 0.3%.

I feel that the TIBOR is likely to stay low for some time as Prime Minister Abe keeps borrowing costs low to encourage economic growth and works towards a targeted sustainable inflation rate of 2% per annum for the country. So, there could be some comfort there despite the high gearing level.

Just like Saizen REIT's loans, the term loans here are amortising in nature. Per term loan, the Trust has to pay JPY 75 million half yearly starting 31 March 2015. This means JPY 75 million x 6 in a year starting 31 March 2015. Per year: JPY 450 million.

On top of this, interest payment if estimated on the high side using 2% is about JPY 0.9 billion or 900 million

With total annual comprehensive income at almost JPY 6 billion, yearly debt repayment will be about 22% of annual comprehensive income from March 2015 to July 2017. In August 2017, the 3 year term loan will have to be fully paid.

Of course, by then, let us hope that the Trust would have found some way of refinancing since it would probably be impossible for them to pay off the remaining JPY 13.6 billion or so in the first term loan using internal resources.

Accordia Golf Trust's guidance is to pay out 90% of its income to unit holders from the 2nd year onwards but what is the distributable income available then? Ah! That is a question people might not have asked as they simply assumed that it would be 90% of the first year's DPU.

At the exchange rate of S$12.20 to JPY 1,000, assuming an annual comprehensive income of S$73.2 million and almost 1.1 billion units in issue, we would get a DPU of 6.65c if 100% of income is distributed to unit holders. If we should expect that only 78% of comprehensive income would be available for distribution from March 2015, then, DPU falls to 5.2c. If we still want that 7% yield, then, unit price has to fall to 74c which is a 24% decline from the IPO price.

Now, if only 90% is to be distributed, DPU could be as low as 5.2c x .9 or 4.68c.

So, at what price would I be interested in initiating a long position in Accordia Golf Trust? Let me talk to my bowling ball and I hope it is in a talkative mood.

Related post:
Accordia Golf Trust: 7% distribution yield.


Steven Yap said...

Accordia Golf Trust: Open Trading At S$0.87, Down 10% From IPO Price At S$0.97.

From BT Invest... 0.o;

AK71 said...

Touched a low of 80c so far. -.-"

AK71 said...

8 months worth of income (from 1 Aug 14 to 31 Mar 15) to be distributed in 2Q 2015. Estimated to be about 6c per unit.

AK71 said...

The two green system, common throughout Japan, helps accommodate varying climates and temperatures with each hole featuring a warm weather green and a cold weather green.

Summer greens are typically seeded with either bermuda or zyosia grass, as this strain responds particularly well to heat. Winter greens are often comprised of bentgrass, which thrives in cooler temperatures. The resulting two-green system allows golfers to play quality conditioned greens year-round despite the extreme differences in temperature season to season.


Siew Mun said...

Touch a low of 0.785 on 19 Aug. Base on estimated 0.06 DPU for eight months, will give you annual yield of 11.5%?

AK71 said...

Hi Siew Mun,

For the first year, yes.

In the subsequent years, the guidance is for a yearly DPU of about 6.8c which means a distribution yield of 8.65% from the second year, if the estimates are right.

AK71 said...

There is a lack of clarity with the land leases and this is a source of concern. It is strange that the golf courses have been able to operate without clarity on land leases for so many years.

73 of the golf courses do not have clear registration of land ownership and it is not uncommon in Japan to find golf courses without clear registration of land ownership.

My research into this area shows that it is not uncommon for Japanese golf courses to be built on plots of land belonging to different owners. An 18 hole golf course will take up a lot of land. So, this could possibly give rise to a strange arrangement of a single golf course leasing land from multiple land owners. Strange to us Singaporeans (because golf courses here lease land from the government) but not to the Japanese.

These land owners collect a monthly lease fee or land rent from these golf courses. Unless they have more productive use for the land, the arrangement is likely to stay as it represents an important source of leasing income for land owners and taxes for the government.

Siew Mun said...

The concern is the governance around multiple land owners collecting rents, ain't that same same but not the same as unitholders?

AK71 said...

Hi Siew Mun,

Er... I don't quite understand your question but, yes, Accordia Golf Trust will have to pay land rent to the land owners, if my findings are right. :)

Thomas Ooi said...


Accordia is heading towards your target price (its at 0.785 at the moment)?

AK71 said...

Hi Thomas,

Target price? Yikes! I don't remember having a target price for this. ;p

AK71 said...

Taking a closer look on the trust’s liabilities, apart from bank borrowings, there are two other items that made up a large proportion of its liabilities.

First, as at 31 December 2013, membership deposits totaled JPY16.9 billion over JPY89.5 billion in the trust’s total liabilities.

These deposits are paid to the trust when a player decides to be a member of Accordia golf courses, granting benefits to players like the inclusion into a loyalty programme that rewards players on a point system for playing on Accordia golf courses.

When asked, AGT mentioned that there are approximately 10 percent (or lesser) of deposit withdrawals on this amount per year which the trust will pre-empt and prepare accordingly.

The trust also noted that given the highly loyal customers which form another pillar of its competitive strength, the withdrawal rate on these deposits can be depended to a large degree of reliability.

As such, there is a reasonable basis to exclude 90 percent of the membership deposits from AGT’s total liabilities when computing its gearing level.

Next, the trust has reported JPY19.7 billion in deferred tax liabilities. AGT clarified that this amount is mainly due to the mismatch of depreciation expenses during the acquisition of assets particularly, golf-related assets.

It should be noted that deferred tax liabilities may only be realised when assets are disposed. Also, this portion of liabilities when realised do not require the trust to separately prepare a provision for the realised amount.

This is because the trust can utilise the disposal amount to offset the deferred tax liabilities. Furthermore, on most occasions, one can comfortably assume that the disposal amount will be higher than the amount realised on deferred tax liabilities.

As such the net effect is a reduction on the residual amount from the disposal.

After these two items are adjusted accordingly, the trust’s gearing level would fall sharply to 36.1 percent, a level that comes closer to the investment trusts listed on the Singapore Exchange (around 30 to 35 percent) and ultimately making it a more viable option for investment.

Accordia Golf Trust: Financials. by Peter Ng

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