Hibiki Path Advisors on Proposed Divestment of Accordia Golf Trust

SINGAPORE–(BUSINESS WIRE)–We, Hibiki Path Advisors Pte. Ltd. (“Hibiki”) manages and/or advises certain entities with aggregate holding of 7.6% of Accordia Golf Trust (“AGT”) shares as of 30^th Jun, 2020. As one of the minority non-conflicted unitholders of AGT, Hibiki is currently actively engaging the trustee manager of AGT, Accordia Golf Trust Management (“AGTM”).

On 29^th June 2020, AGTM has published the press release to recommend to unitholders’ the divestment of all of its golf courses to Parent company at an indicative consideration per unit of 0.732. We would like to publicly announce that we are disappointed with this price which is unarguably low based on our understanding. We are hoping that all independent unitholders agree that this price does not provide “reasonable” premium to fully take over a publicly traded entity generating a significantly attractive cashflow. We will be voting against the proposed divestment in the case the price is not revised higher. As the leading minority unitholder, we are also open for constructive negotiation with the bidder.

We would like to share our thoughts on the following four key areas of concerns to justify our decision to vote against the indicative price of 0.732 which we hope all unitholders will also review in their own discretion. We also wish that AGTM can address the concerns mentioned below for us to reconsider on our position as well as to act in the best interest of unitholders to further negotiate with the bidder to pay a reasonable premium over the current indicative offer.

1. Business Condition, and Dividend-Per-Unit (DPU)

AGTM mentioned in the latest press release that AGT has traded at substantial discount to NAV for a prolonged period of time and due to such it was not able to do an accretive offering to purchase more golf courses. We feel that such discount was largely attributable to chains of questionable untimely disclosure and financial policies by the executives of AGTM over the past few years and not based on the fundamentals of the business itself. We have, in the past, shared our latest letter to AGTM in our website as follow.

(http://www.hibiki-path-advisors.com/en/message/2020/english-letter-to-board-of-members-of-accordia-golf-trust-june-2020/).

(in JPY mn otherwise stated)		FY 14/15 (*1)	FY 15/16	FY 16/17	FY 17/18	FY 18/19	FY 19/20
Total Operating Income		33,425	53,175	51,919	51,450	51,159	51,667
EBITDA		6,548	12,760	11,910	11,350	10,034	11,939
(EBITDA % to Revenue)		19.6%	24.0%	22.9%	22.1%	19.6%	23.1%
Actual DPU (SGD cents)		5.71	6.63	6.04	3.85	3.77	4.30
Pro-forma DPU, Hibiki est. (SGD cents)					4.71 (*2)		5.75 (*3)
(*1) FY 14/15 is from August 2014 to March 2015 (only one dividend payment)
(*2) Larger than normal golf membership deposit redemption paid from unitholder funds as opposed to from debt facilities
(Hibiki estimate of total extra of JPY 910mn gross, adjusted for tax)
(*3) Project payment reserves, and special reserve for operations, totalling JPY 1,562 mn gross, adjusted for tax.
(Source: AGT Financial Statements and Hibiki)

If we look into the table above, we can see that except for FY18/19 when Japan was hit by severe and unusually bad weather throughout the year, revenue and EBITDA has remained stable and business was extremely profitable – generally above 22% EBITDA margin.

We would also like to highlight the fact that annual dividends have been substantially lower at around 3-4 cents for the past three years, as compared to 6-6.6 cents in FY15/16 and FY16/17. For example, FY17/18 DPU of 3.85 cents were artificially low due to larger than normal redemption in golf membership deposits (FY2017/3 JPY 1.0bn, FY2018/3 JPY 1.9bn, FY2019/3 JPY 1.0bn, FY2020/3 JPY 592mn) which is not an operating item. Membership deposits are “liability” item that should also be financed by debt type funding in order to avoid rising cost of capital, but it was paid out from unitholders’ funds.

On FY19/20 we are aware that substantial reserve amounting to JPY 1,562mn was made, which is now announced that part of it will be paid out after this potential transaction after we have raised the voice. Similar to the asset impairment issue we will discuss later, such irregular items have reduced the DPU substantially but they were not been given adequate highlight both in the financials and in the presentation materials.

We opine that such issues have resulted in lower expectation from investors, and widened the discount to NAV, which may have been avoided by proactive and timely disclosure by AGTM management. We are uncomfortable when constant and substantial discount to NAV seems to be used as an argument to justify the fairness for the indicative bid price.

Lastly, we view that as long as there are no irregular subjective items being charged to unitholder funds, AGT has the natural capability to distribute SGD 5.5 cents to 6.0 cents in normal weather condition and with current healthy Loan-to-value level. If we use 5.75 cents (FY19/20) Hibiki estimate pro-forma DPU as the reference level and discount that by 7% dividend yield, which is exceptionally high compared to J-REIT yield (TSEREIT Past 12month based dividend yield as of 29 June 2020 is 4.5%, source by Bloomberg) the per unit value can be around SGD 0.821. We believe this price to be a reasonably derived reference price level in absence of any opportunistic and optimistic scenario. In our view, at current price, AGT is still a rare investment opportunity hard to find anywhere else in the world.

2. On Asset Impairment and Net-Asset-Values

As we turn back the clock, press release made by AGTM on 28^th June 2018 mentioned the commencement of the “feasibility study” surrounding area of Nishikigahara Golf Course, which coincidentally was announced only three days after Pricewaterhouse Coopers, the independent auditor, has signed off the FY 17/18 financials. Nishikigahara Golf Course appraisal has been reduced from JPY 4,610mn held in December 2017 to JPY 973mn in December 2018 (down 78.9%) without any notice of the progress of this infrastructure work and after 6 months from the press release.

While this has been significant in terms of magnitude of change in value for the specified golf course, it only consisted of 3.1% of total AGT golf course appraisal value of JPY 149,236mn (December 2017). We are yet to reasonably understand why it has triggered the “goodwill” impairment of JPY 13,144mn, reducing the unitholders’ equity value by 16%, while total number of visitors for AGT “increased” by 0.5%YOY in FY17/18 which is an encouraging sign for its future cashflow. Further to that, the total appraisal value of golf courses excluding Nishikigahara Golf Course has only declined by 0.5% in December 2019 (as opposed to -1.1% in December 2018).

It has also come to our attention that the appraisal value has declined by 2.0% YOY as at December 2019 while AGT had the highest number of visitors in FY/19/20 since its IPO, and similarly its second best annual EBITDA of JPY 11,939mn. We have been questioning the management of AGTM about the rationale of this chain of events since 2018 while there has been extremely limited explanation to its financials on the changes of NAV. We are extremely concerned as the direction of business/cashflow clearly coincides with the direction in appraisal value.

Due to the sensitive period where the proposed transaction is under consideration, we would like AGTM to address our concern on the above mentioned NAV issues and further share on the appraiser reports from Colliers, an independent appraiser who is engaged in the valuation, especially on their opinion on changes of Nishikigahara Golf Course valuation over the past two years while there has not been any official announcement of commencement of work since 2018. We feel that as unitholders, we have the right to apprise on these items especially now in order to make the correct decision for the proposed transaction.

3. On Quarterly Financial Announcement

As the leading minority unitholder for AGT, we are deeply concerned and disappointed that the Board of AGTM has approved the decision to discontinue announcement of quarterly financials during this extremely sensitive situation concerning the bid from an interested party.

Especially when the press release from AGTM mentioned that the valuation both by Duff & Phelps and Colliers were based on 31^st May 2020 and indicates there were impact from Covid-19 outbreak, showing even lower aggregate value than that of March 2020 appraisals re-conducted only three months after December 2019 report. We would not only like to check with the summary evaluation but with general business and financial conditions on how things were, especially as we have anecdotally observed that Golf playing in Japan has recovered substantially in June from other sources. In order for unitholders to make a fair assessment of the bid comparing to the future potential value of AGT’s golf business, we view that this April – June period quarterly financial information is “critical”.

4. On Various Fees

(in JPY mn otherwise stated)		FY 14/15 (*1)	FY 15/16	FY 16/17	FY 17/18	FY 18/19	FY 19/20
A. Total Operating Income		33,425	53,175	51,919	51,450	51,159	51,667
B. Golf Course Mgt Fee paid to “Parent”		3,905	6,048	5,915	5,823	5,789	5,766
C. Trustee Mgr Fee paid to “AGTM”		174	264	253	254	250	268
D. Asset Manager Fee paid to ‘Daiwa Real Estate’		66	99	100	99	96	95
Total Fees (i.e. B+C+D)		4,145	6,411	6,268	6,176	6,135	6,129
EBITDA		6,548	12,760	11,910	11,350	10,034	11,939
(Total Fees B+C+D / EBITDA)		63.3%	50.2%	52.6%	54.4%	61.1%	51.3%
(Fee to “Parent”/Revenue – i.e B/A)		11.7%	11.4%	11.4%	11.3%	11.3%	11.2%
(*1) FY 14/15 is from August 2014 to March 2015 (only one dividend payment)
(Source: AGT Financial Statements and Hibiki)

For our fourth point, we would like to highlight some key important fact. Based on the Golf Course Management Agreement, AGT has been paying a substantial amount of fees to the parent company, around JPY 5.7bn to 6.0bn each year, amounting to 11% of total Revenue. While it is difficult to judge the fair level of such fees, this fee seems to be positioned as a royalty and system usage fee for the Business Trust to be part of Accordia Golf Group. We are aware of similar type management contract with Hotel and hospitality businesses and its generally perceived “fair” range is around 15-30% of Gross Operating Profit (GOP). Our estimate shows AGT is paying approximately 33% of GOP to the parent company. Internalizing this fee stream would immediately create synergies between the two entities.

Additionally, if AGT is to be delisted and AGTM to be wound up, fees to the Trustee-Manager will also no longer be required as well as with the fees to Daiwa Real Estate Asset Management. Such three fee items, combined, amounts to 50-63% of EBITDA each year, which is substantial, and we would like to request parent company to share such synergies with the minority unitholders by paying a certain level of “control premium” to NAV in order to facilitate the transaction. We believe this to be a reasonable argument AGTM can bring up in its negotiation with the parent company.

We hope AGTM will publicly respond to the queries we have mentioned above as we believe these are material information required by the unitholders to make the best decision on the proposed divestment. Without these information and a substantial increase for the indicative price, we will have to vote against the proposed divestment.

Should the proposed divestment be voted down, we are happy to continue as an engaging and constructive long-term unitholder for AGT. We are confident on the superior operating wisdom of AGT as the leading golf course operator in Japan which was proven through the recent Covid-19 pandemic. We look forward to continue maximizing the long-term unitholder value together with fellow unitholders and with all the interested parties including the parent company.

Contacts

Hibiki Path Advisors Pte. Ltd.

Chief Investment Officer

Yuya Shimizu

www.hibiki-path-advisors.com
info@hibiki-path-advisors.com