Description

Takara Leben Real Estate Investment Corp (hereafter Takara REIT) is the real estate investment trust for Takara Leben Corp. We previously wrote-up Takara Leben (8897 JP) on January 28, 2016 and would urge you to read that write-up for some background. Takara Leben Corp. (Takara) is a developer of low to mid-end condos in Japan (generally sub 10 story buildings). Its business model is unique in that it focuses on suburban properties close to train stations. In turn it has avoided the more saturated downtown developments of most its peers. It also has avoided some of the tax policy fueled demand of high-rise developments. As an outgrowth of this model the company has increasingly focused on regional cities like Kukui, Kanazawa, Nagasaki, Hokkaidou, etc. These areas lack the competition of the Tokyo metro area, but they also offer special local incentives. As the Japanese population ages local governments are keen on enhancing their housing stock to meet the needs of the population. In the 09/03 fiscal year 46% of Takara’s construction were outside of Tokyo. This will be > 50% in the current 03/20 fiscal year. Takara holds over 4 years of land supply and 68% of that is out of Tokyo.  

When we originally wrote up Takara we highlighted its unique condo franchise. Our differentiated view at the time was that Takara had an undervalued asset in utility-scale solar developments (an outgrowth of its solar expertise that grew out of it putting solar panels on its residential developments). We believed it could list those assets on a new infrastructure fund and unlock hidden value. It subsequently did just that listing the Takara Leben Infrastructure Fund (9281 JP) in June 2016. Since that time the company has developed a completely new franchise in redeveloping residential and non-residential property in regional cities. These projects are typically highly tax advantaged and have the benefit of enhancing the core new condo franchise. We saw this business within Takara as a nice option. But ever nimble (Takara is still 21% owned by its founder Yoshio Murayama and the company is an active buyer of its stock), did the same with these regional redevelopment assets and moved to monetize them. They listed the Takara REIT in July 2018. The REIT was listed at 89,700¥ and today trades at 128,800¥. It has a 4.8% dividend yield. The REIT has a mix of assets that is roughly 30% residential rental, 25 % office, 15% retail, and 30% hotel.

We believe the REIT is undervalued. With a $553m market cap and an ADV of $5-6m it is undersized relative to the fairly well-developed REIT market in Japan. We think this is a significant part of the valuation discrepancy between larger REITs which trade at 1.5-3.0% yields. Even the very broad TSE REIT index has a < 3.5% yield. At that level the Takara REIT would have 40% upside.  

But in sharp contradistinction to other Japanese REITs, we believe there is considerable growth to come to the Takara REIT. The Takara REIT holds real estate assets of 65b¥. On Takara’s balance sheet there is 62.6b¥ in “liquidation Assets” that it will ultimately inject into the REIT. These assets carry debt of 41.4b¥. We believe asset value at the REIT will continue to grow 15%+ for years to come. While there is little value arbitrage between Takara and the REIT at current valuations, recycling the assets allows Takara to grow faster and in turn the REIT to acquire more assets. As it closes the gap with larger peers, we see a < 2% yield as possible given its unique set of assets. At Ichigo type yields there is well more than 100% upside.

Beyond the REIT, we believe the entire Takara complex is undervalued. We first wrote up Takara with the stock at 556¥. Fast forward to today where the stock is 506¥. Between that write-up and this one the stock has hit 911¥ and 290¥. It’s been quite a ride! 

Since that write-up the company has done a lot of what we expected. They were the first to list (their aforementioned solar assets) on a new Japanese infrastructure market. The fund listed at a tock price of 100,000¥ and today trades at 118,900¥. The entity yields 5.88%. As with the REIT we see Takara injecting assets in the fund for years to come. The fund holds 41 MW of solar assets and Takara itself holds 79 MW. We had originally assumed Takara would have developed 100 MW of solar assets by this time, but it has exceeded those expectations. We believe the infrastructure fund should trade at or below a 4% yield, which would generate close to 50%+ upside.

Takara itself looks undervalued. Takara Leben owns 3% of the REIT and 10% of the Infrastructure Fund. The liquid stakes alone are worth 7% of Takara’s market cap. More importantly on our math we see the value of the solar assets still held by Takara as being worth > 200¥ to the stock price even at today’s infrastructure fund valuation. The book value of the assets Takara had under development that can ultimately inject into the REIT is 175¥ to the share price.

One thing that has not gone as favorably since the original write-up is the development of the core condo development itself. We assumed the company could sell 1,800 units a year at a 24% gross margin. With a general slowdown in the real estate market driven in part by changes in tax law (see gvinvesting write-up on Shinoken Group for some details on that) the company has only managed to grow its depressed 03/16 condo unit sales from 1,448 to 1,502 in 03/17, 1,619 in 03/18, and 1,656 in 03/19, all with gross margins between 20.6% and 21.1%. It does look like Takara might deliver > 1,900 units in 03/20 at a 20.7% gross margin. But out original view that core condo, detached unit, and real estate management EPS could be > 80¥ looks optimistic. Instead we assume 1,500 to 2,000 condo unit sales from our Bear to Bull Cases at a < 22% gross margin. Still, ex the REIT and infrastructure fund stakes we believe the core Takara business is trading at < 5x earnings.

We recommend looking at all these entities. The REIT is actually the most liquid of the vehicles. It’s market cap is almost equal to that of Takara but the float is higher without the founder’s shareholding. Takara trades $2-4m a day. The Infrastructure Fund is illiquid but could be appropriate for smaller funds or individuals.  

Catalyst

-Continued property injections from Takara Leben to Takara Leben Real Estate Investment Corp. 

-Clarity on Japanese properyy tax policy

-Stable dividend payouts