Challenger Limited · ASX:CGF
Challenger — Challenger Kenedix Japan Trust — FY2008 Earnings Presentation
46 slides from Challenger's earnings presentation, Aug 22, 2008
Slide 1: Challenger Kenedix Japan Trust Results for year ended 30 June 2008
Challenger Kenedix Japan Trust (ASX:CKT) Results for year ended 30 June 2008 Brett McCarthy – Fund Manager 22 August 2008
Slide 2: Important notice
Important notice Information contained in this publication is current as at 22 August 2008 unless otherwise specified and is provided by Challenger Listed Investments Limited (ABN 94 055 293 644) (AFSL 236887) (“Challenger”), as Responsible Entity of the Challenger Kenedix Japan Trust (ARSN 124 068
Slide 3: Overview of CKT
Challenger Kenedix Japan Trust ASX: CKT Overview of CKT Predictable, attractive and secure income returns Simple and transparent business model 20 quality retail properties in major urban & suburban locations across Japan Long-term leases to well-regarded tenants. WALE 16.3 years1 Tenancy
Slide 4: FY08 highlights
FY 08 highlights ¾ Solid financial performance – $21.7 million1 profit from operating activities – $7.8 million net gain on property revaluations – Strong underlying cash flows from long-term leases ¾ Secure financial position – Average debt duration 3.9 years – no refinancing expiries until April 2
Slide 5: Financial results
Financial results
Slide 6: Solid financial performance
Solid financial performance ¾ Total income of $33.1 million includes other income of $6.9 million – mainly from interest on cross-currency swaps ¾ $21.7 million profit from operating activities ¾ Tracking ahead of expectations – FY08 distribution of 13.6 cents per unit in line with guidance year end
Slide 7: Secure financial position
Secure financial position ¾ Total assets up $217.9 million – $179.91 million in acquisitions (partly funded via $75.0 million from second instalment) – $7.8 million from revaluation of properties ¾ Gearing (debt to total assets) 49.3% ¾ Interest cover2 at 4.3 times Increase/ 30 Jun 08 30 Jun 07 (dec
Slide 8: Borrowings
Borrowings ¾ Total Yen loan facilities ¥36.3 billion ($356 million1) ¾ Borrowings ¥34.8 billion ($342 million3); hedged 95% ¾ Weighted average debt duration 3.9 years ¾ No refinancing expiry until April 2012 As at As at Master TK Group 30 June 2008 30 June 2007 Borrowings ¥ billion 34.8 22.7 Hedged
Slide 9: Debt covenants
Debt covenants ¾ Banks lending to CKT are SMBC (¥24.93 billion) and Shinsei (¥9.86 billion) ¾ Covenants include: − Loan-to-valuation (LTV) ranging from 65% to 70% − Debt service cover ratio (DSCR) greater than 1.25 times ¾ At 30 June 2008 CKT operating within covenants − At low end of LTV range, pro
Slide 10: Hedging used to manage FX risks
Hedging used to manage FX risks ¾ CKT invests in Japanese property with exposure to fluctuations in exchange rates potentially impacting property values and income derived ¾ CKT uses hedging as a risk management tool to minimise impact of FX volatility ¾ Two types of foreign exchange hedges used by
Slide 11: NTA $1.91 per unit
NTA1 $1.91 per unit ¾ FX volatility is substantially offset by the combination of capital hedging and income hedging, as changes in the value of these hedging arrangements are recorded on the balance sheet 2.10 CKT - NTA movement (since IPO) 2.00 0.10 0.01 0.05 0.13 0.18 1.90 0.50 0.12 1.80 1.70 $1.
Slide 12: Portfolio update
Portfolio update
Slide 13: Portfolio overview
Portfolio overview 30 Jun 08 30 Jun 07 Total portfolio value ¥ millions 62,163 42,571 No. of properties 20 12 Net lettable area sqm 280,9961 96,077 Occupancy % 100 100 WALE2 (by income) years 16.3 16.0 Weighted average cap rate (%) % 4.86 4.87 Weighting to largest asset (%) % 17 23 Footnotes 1. Incl
Slide 14: Quality properties – retail focus
Quality properties – retail focus (sample of properties only - not the complete portfolio) Carino Chitosedai Carino Tokiwadai Izumiya Hakubaucho Unicus Ina Valor Toda Life Higashinakano Life Asakusa Osada Nagasaki Yaoko Sakado Chiyoda Sunny Noma Kansai Super Saigo Kojima Nishiarai 14
Slide 15: Property revaluations
Property revaluations ¾ Policy – each property externally revalued every year ¾ When internal valuation varies -/+5% external valuation sourced ¾ All properties valued during FY08 ¾ 10 properties out of 20 revalued as at 30 June 2008 − Values remained steady (0.01% movement) ¾ Full year impact of pr
Slide 16: Geographic diversification
Geographic diversification ¾ 49% of portfolio by income is in the Greater Tokyo area Geographic diversification (by income1) 3% 15% 5% 39% 15% 4% 7% 10% 2% Tokyo Hiroshima Sendai Saitama Kyushu Kansai Hokkaido Chubu Hyogo Footnotes 1. Based on current annualised income 16
Slide 17: Tenant diversification enhanced
Tenant diversification enhanced ¾ Increased focus on supermarket sector with stable, non-discretionary spending Tenant type diversification (by income1) Major tenants % portfolio (by income) income (vs 7% IPO) 8% Life Corp. 16% (12%) (supermarket) 43% Valor Co., Ltd 15% (9%) 18% (supermarket) Centra
Slide 18: Tenant update – established tenant portfolio
Tenant update – established tenant portfolio ¾ CKT’s top 10 tenants (86% of net property income) Stock Annual Operating Tenant Name Industry Sector % of CKT's exchange Market Cap Revenue Gross Profit Profit Debt to total No of 1 1 NPI listing (A$m) (A$m) Margin Margin assets Employees Life Corp. Sup
Slide 19: Lease expiry profile
Lease expiry profile ¾ Portfolio WALE (by income) 16.3 years1 Lease expiry profile (by income)* 40% % .1 33 30% 19 .8% % .5 19 20% % .3 11 10% 5% 7% 8% 4. 1% 6% 6% 3. 2. 2. 1. 1. 0% FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 Beyond Footnotes 1. Ass
Slide 20: Rent review profile
Rent review profile1 ¾ Majority of leases have market rent reviews every 3 – 5 years ¾ No reviews or expiries in FY09 FY Beyond 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Property Carino Chitosedai (Central Sports) Car
Slide 21: Outlook
Outlook
Slide 22: Japanese economic outlook
Japanese economic outlook ¾ Cautious consensus outlook for Japanese economy – Global economic slowdown now reflected in Japanese economy – Real GDP growth in 2008 and 2009 expected to be positive but low (UBS CY08 forecast 0.9%; CY09 1.3%) – BoJ appears unlikely to raise interest rates in the short
Slide 23: Japanese retail market trends
Japanese retail market trends ¾ Non-discretionary spending up despite overall retail 20 Tokyo department store sales (all stores; % change yoy) spending decline 15 10 − Slowing demand for high-priced 5 % chg yoy fashion reflected in falling 0 May-06 May-07 May-08 Mar-06 Nov-06 Mar-07 Nov-07 Mar-08 J
Slide 24: Distribution guidance
Distribution guidance ¾ Distribution guidance of 17.2 cents per unit for FY09 First announced 14 Feb-08 17.2 Re-affirmed 22 Aug-08 13.6 12.19 cents per unit 11.64 1.42 1.42 FY07 FY08 FY09 IPO forecast Actual distribution Guidance Notes to guidance FY09 guidance assumes no further acquisitions 24
Slide 25: In summary
Challenger Kenedix Japan Trust ASX: CKT In summary ; Simple business model ; Attractive and secure income returns from quality properties ; Long-term leases to well regarded tenants with retail focus ; Unique and strong management platform and relationship with Kenedix ; No refinancing expiry until
Slide 26: Questions
Questions
Slide 27: CKT contacts
CKT contacts Brett McCarthy Fund Manager Tel: + 61 (0)2 9994 7219 Email: [email protected] Paul Hill Assistant Fund Manager Tel: + 61 (0)2 9994 7878 Email: [email protected] Luke Keighery Investor Relations Tel: + 61 (0)2 9994 7633 Email: [email protected] Website www.chall
Slide 28: Appendices
Appendices
Slide 29: Income statement
Income statement Year ended Year ended 30 June 2008 30 June 2008* $’000 ¥m Net property income 26,169 2,571 Interest income – Master TK 174 17 Interest income - Trust 384 - Interest income on cross-currency swaps 4,968 - Gain on foreign currency contracts 938 - Other income – Master TK 447 44 Total
Slide 30: Income statement (continued)
Income statement (continued) Year ended Year ended 30 June 2008 30 June 2008* $’000 ¥m Net operating profit after withholding tax 19,185 1,385 Gains/(losses) from fair value movements of properties 7,840 768 Gains/(losses) from fair value movements of interest rate derivatives (3,488) (339) Gains/(l
Slide 31: Distribution statement
Distribution statement Actual Year ended 30 June 2008 $’000 Net profit/(loss) after tax attributable to unitholders 16,978 Adjusted for: Fair value gain on investment properties (7,840) Fair value loss on interest rate derivatives 3,488 Fair value loss on other derivatives 2,611 Deferred tax expense
Slide 32: Balance sheet
Balance sheet As at 30 June 2008 As at 30 June 2007 CKT consolidated balance sheet $’000 $’000 Assets Cash and cash equivalents 29,796 12,093 Trade and other receivables 2,440 7,459 Derivative financial instruments 19,944 24,540 Other assets 471 1,115 Investment properties 611,090 406,320 Tenant dep
Slide 33: Balance sheet
Balance sheet Master TK Balance Sheet 30 Jun 2008 30 Jun 2007 ¥m ¥m Assets Cash and cash equivalents 2,700.6 935.2 Trade and other receivables 243.7 773.4 Derivative financial instruments (116.4) 222.3 Other assets 45.0 113.8 Investment properties 62,049.5 42,571.4 Other financial assets 3.0 3.0 Ten
Slide 34: Appendices - Hedging
Appendices - Hedging
Slide 35: Foreign Currency risk management
Foreign Currency risk management ¾ CKT invests in Japanese property with exposure to fluctuations in exchange rates potentially impacting property values and income derived ¾ CKT uses hedging as a risk management tool to minimise impact of FX volatility over short to medium term ¾ Two types of forei
Slide 36: Income Hedges
Income Hedges ¾ Income hedging provides stability of income distributions ¾ CKT’s income hedging policy is to hedge 80-100% of estimated distributions for years 1 to 5 and then up to 90% of estimated distributions for years 6 to 10 ¾ CKT has entered into contracts with both UBS and CBA to exchange J
Slide 37: Income hedges: AUD equivalent of ¥1m
Income hedges Income Distributions - hedged vs unhedged 12,200 11,800 AUD Equivalent of ¥1m 11,400 11,000 10,600 10,200 9,800 9,400 9,000 Aug 07 Feb 08 Aug 08 Feb 09 Aug 09 Distribution Dates Hedged Unhedged ¾ For each distribution date, the spot rate was higher than the hedged rate ¾ Hedging provid
Slide 38: Capital Hedges
Capital Hedges ¾ Capital hedging aims to lock in AUD value of Japanese assets at a future time ¾ CKT’s debt (representing around half of property investment) is denominated in JPY − a natural hedge exists for this amount ¾ Unitholders therefore exposed for their net investment in the Japanese assets
Slide 39: Capital Hedges
Capital Hedges ¾ CKT policy is to hedge up to 50% of its net investment in Japanese assets − currently around 40% ¾ An interest rate differential exists between Japan at 1.28% and Australia at 6.67%1 ¾ CKT receives the benefit of this interest rate differential on 40% of its net investment. The inte
Slide 40: Capital Hedges
Capital Hedges ¾ At maturity of a swap there will be an exchange of principal amounts and depending on the spot rate at that time there will be a settlement amount paid or received. ¾ CKT can close out and extend the existing hedges at anytime before maturity ¾ CKT closely manages these maturity dat
Slide 41: Combination of income and capital hedges
Combination of income and capital hedges ¾ CKT believes that the combination of 100% of estimated income distributions hedged and approximately 40% of its net investment in Japanese assets hedged, partially mitigates the currency volatility ¾ The chart on the following slide shows the impact on NTA
Slide 42: NTA $1.91 per unit
NTA $1.91 per unit ¾ FX volatility is substantially offset by the combination of capital hedging and income hedging, as changes in the value of these hedging arrangements are recorded on the balance sheet 2.10 CKT - NTA movement (since IPO) 2.00 0.10 0.01 0.05 0.13 0.18 1.90 0.50 0.12 1.80 1.70 $1.6
Slide 43: Hedging profile – income
Hedging profile* – income Settlement date Exchange rate August 2008 87.32 First five years: February 2009 85.01 100% of estimated distributions August 2009 82.93 February 2010 80.55 Years six and seven: August 2010 78.66 90% of estimated distributions February 2011 76.52 hedged in years six and seve
Slide 44: Hedging profile – equity capital
Hedging profile* – equity capital AUD amount JPY amount Settlement date Net interest rate $ million ¥ million December 2010 $3.1 ¥301.0 6.4% February 2011 $6.2 ¥562.3 6.3% August 2011 $27.0 ¥2,502.9 5.2% December 2011 $3.1 ¥301.0 6.2% February 2012 $6.7 ¥618.3 6.1% August 2012 $27.0 ¥2,502.9 5.0% De
Slide 45: Exchange rates
A$ / Yen 30 -A p 80 85 90 95 100 105 110 30 r-0 7 Source RBA -M ay -0 30 7 -J un - 30 07 104.7 -J u 30 Jun 07 30 l- 07 -A ug -0 30 7 -S ep Exchange rates 30 -0 7 -O ct 30 -0 7 -N ov 30 -0 -D 7 ec -0 30 7 98.1 -J an 31 Dec 07 29 -08 -F eb 30 - 08 -M ar -0 30 8 -A p 30 r-0 8 -M ay -0 30 8 -J un - 30 0
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Challenger Kenedix Japan Trust — FY2008 Earnings Presentation on 6ix