Galileo Japan Trust

It’s a wrap

Sakura Sogo REIT successfully listed on the Tokyo Stock Exchange which brings the curtain down on GJT. As the sale proceeds from the property portfolio in Yen has been converted into Australian dollars at an exchange rate of A$1:¥78.08, shareholders are expected to get a special distribution between $2.68 and $2.69 and an ordinary distribution of between 3 and 4 cents.

I did a quick post mortem on the numbers based on what was disclosed in the initial information memorandum in February 2016 and discovered that some unexpected cost were incurred. Back then, management forecasted the special distribution to be $2.65 based on an exchange rate of A$1: ¥82. Assuming management forecast in Feb 16 were accurate, the favourable exchange rate movement since February should have resulted in a special distribution of $2.78 (8-9 cents higher than what was recently announced).

My analysis indicates that management’s February forecast didn’t include the following expenses:

  • Earthquake repair works in April 2016 after Kunamoto earthquake
  • Capital expenditure incurred for 6 months to June 2016
  • Unfavourable movement in interest rate swap in the Japanese TK business
  • Unamortised debt costs as at 30 June 2016 written off

Some of these were obviously unforeseeable (earthquake and interest rate movements) but I wonder whether the other costs should have been foreseen?

Luckily, the appreciation in the Yen more than offset these unforeseen costs. If the Yen had stayed at A$1: ¥82, my calculations show that the special distribution would have been $2.59. This would have resulted in a distribution about 2-3% lower than expected.

For long term holders, it doesn’t really matter but for short term traders it emphasis the lesson of allowing for some error in management’s forecast even for situations like this where the income and expenses are relatively easy to forecast.

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