Strong underlying progress
Japan Residential Investment Co Ltd (LONDON:JRIC) showed strong progress in H114, with portfolio growth of 34% and underlying profit growth of 36%, both in yen terms, as the proceeds of the October 2013 capital increase were quickly put to work, geared with additional low-cost borrowing. Despite a c 18% decline in the average value of the yen versus sterling, underlying sterling net profits were 15% higher and underlying sterling EPS was flat at 1.7p. As acquisitions contribute fully, on current exchange rates, we expect the forecast 3.6p full year dividend to be fully covered by underlying earnings. The development of the Japanese economy suggests that rental growth and continued valuation gains, not included in our forecasts, are a realistic prospect.
H114 results
Gross rental income rose by 15% to ¥1,439m, underlying profit by 36% to ¥616m, and underlying profit per share by 21%. Unrealised valuation gains on investment property added ¥480m or 2.3% of NAV. The strong performance in the business operations was masked in its reported sterling results by the decline in the value of the yen, although the H1 closing rate was little changed from the FY13 year end. Underlying net profit in sterling terms was up 15% (£3.6m versus £3.1m), while statutory net profit in sterling terms was £6.3m in the period, down £1.4m from H113. Underlying EPS in sterling was flat at 1.7p and DPS unchanged at 1.8p.
2014 outlook
The assets acquired in H1 added nearly 25% to the portfolio and contribute estimated net operating yields of 5.2%, attractively ahead of the marginal average debt cost of 0.75%. Additionally, we forecast some earnings uplift operational leverage. Negative real interest rates in Japan are generating investor interest in real estate, reducing valuation yields and supporting H1 unrealised valuation gains. At current rates, we expect some continued headwind to the sterling results in H2 from exchange rate effects, but still see dividend cover at 104% for the year as a whole (H1 95%) as acquisitions contribute more fully.
Valuation: Yield 6.3%, NAV premium below peers
JRIC generates a yield of 6% from a broad portfolio of residential properties with a high and relatively stable occupancy. For the reasons above, we see a significant improvement in yen dividend cover to 1.1x in 2014. JRIC trades around NAV, while most Japanese REITs are trading at substantial premiums.
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