Golf may be viewed as a “rich man’s game” in Singapore – a sport that not many Singaporeans take part in. However, even if one does not play golf, it is still possible to make money out of investing in a business related to golf and, in this issue, we are going to take a look at Accordia Golf Trust (AGT).

The Business

Japan mapAGT is a business trust that invests in golf course assets in Japan. It has three main revenue sources including golf courses, restaurants and memberships. Being a relative young trust on the Singapore Exchange since its debut on 1 August 2014, its portfolio consists of 89 golf courses located across Japan, with 70 percent of them located in the three largest metropolitan areas namely the Greater Tokyo Region, the Greater Nagoya Region and the Greater Osaka Region.

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The most attractive part about investing in this trust is its high distribution per unit (DPU), which is looked at favourably by investors looking to increase their passive income. Based on AGT’s trailing 12-month (TTM) DPU of $0.0604, TTM yield would be about 8.2 percent based on current share price of $0.74.

However, whether the current yield level is sustainable is an important question that all investors will be concerned with. We examined its latest FY17 financial data thoroughly to help investors make an informed decision.

Exposed To Weather Conditions

Investors may not be thrilled with AGT’s latest financial figures for FY17. In its latest result, the trust saw revenue decline 1.9 percent to JPY51.9 billion while net profit plunged 38.6 percent to JPY4 billion.

AGT attributed its poor performance to poor weather conditions that was responsible for the loss in revenue as the trust faced an earthquake in Kyushu, heavy and torrential rain, and subsequent heavy snowfall in FY17. The harsh and erratic weather conditions have certainly taken a toll on the top line as operations were disrupted under poor weather conditions.

Regardless, the weather is certainly an aspect that AGT does not have control over. Prior to investing in the trust, investors should take into consideration that the possibility of continuous poor weather will result in poor top line performance.

In FY17, the trust recorded a 2.3 percent increase in overall operating expenses which rose to JPY45 billion. This was mainly attributed to non-cash impairment loss of JPY 1.5 billion which was recorded for FY17. AGT “adopted a more conservative approach on the recognition of impairment loss for accounting purpose” despite the valuation of its total portfolio still being higher than the initial portfolio (JPY150.89 billion vs JPY150.31 billion). As a result, “the non-cash impairment loss of JPY1.5 billion was recorded for accounting purposes. More significantly, this accounting treatment has no bearing on the distributable amount as distributable amount is calculated based on actual cash flow”.

Apart from the above factor, tax expenses were also 67.2 percent higher at JPY800 million due to reversal of deferred tax liabilities and ultimately the trust’s bottom line took a toll.

Focus On Investment Merits

Over the past three financial years, FY17 recorded the lowest distributable income at JPY5.2 billion, which translated into JPY4.71 per unit. This pales in comparison to previous distributable income level of JPY6 billion in FY16, and JPY5.7 billion in FY15. Naturally, the declining distributable income is a cause for concern for investors. However, we believe that there are still several reasons for investors to continue holding on to AGT.

Firstly, we expect that revenue will remain stable as the trust continues to maintain a steady stream of golf plays at around 87 million. Assuming so, DPU is likely to be supported in the long term as the company continues to generate a stable source of income from visitations to its golf courses.

Meanwhile, distribution yield of the trust remains attractive at its current price. Since the number of plays did not decline drastically despite the poor weather, we believe that revenue will likely not decrease further in the future. Taking a conservative stance by assuming the absence of revenue growth and constant DPU of 6.04 cents per financial year, its current yield of 8.2 percent may still be attractive for investors since it beats the average DPU yield of 6.7 percent achieved by Singapore Real Estate Invest Trusts (S-Reits).

In addition, there is a high degree of certainty that AGT’s golf courses will continue to operate. This is because 80 percent of AGT’s golf courses are on freehold land instead of leasehold. This means that we can reasonably assume that there will be minimal changes to the number of golf courses that AGT operates, since they are not significantly exposed to forced closure upon the end of the lease term.

Potential Pitfalls
golf course

Adverse weather conditions may very well persist through to the next financial year. Climate change may bring about worsening weather conditions that will see both the top and bottom lines of AGT plunging as golf courses halt operations. Furthermore, with President Trump’s refusal to acknowledge climate change and even withdrawing from the Paris Climate Accord, the road ahead seems bleak with imminent changes to the weather patterns.

However, considering that AGT faced unfavourable weather conditions in FY17, we can assume that poor weather conditions may not affect its revenue any more than it did this year. Therefore, it might suffice to assume that this year’s performance would be the “worst-case scenario”.

Apart from that, AGT is only doing short-term hedging on the distribution amount to minimise foreign exchange risk to unitholders. Hence investors should also be aware that a weakening of the Japanese yen against Singapore dollar will worsen the DPU for investors in the long run as currency risk is not hedged.

There are no obvious changes in rates of utilisation of the golf courses. Over the past three years, AGT’s golf courses utilisation rate has fluctuated between 77.6 percent and 77.9 percent. Whilst net operating income margin has actually declined across all regions, we would expect AGT to focus on lowering its operating expenses to improve on profitability going forward.

Limited Downside

Considering that the trust has been experiencing harsh weather conditions in FY17, investors can likely anticipate similar, if not higher DPU in subsequent years. That said, investors should continue to monitor its operating margins closely to observe any further deterioration that may reveal a more fundamental weakness in the trust’s management.

In the future the trust may also choose to expand the number of golf courses which will bode well for the financial performance. If fully funded by debt, the increase in profits will drive up DPU and given Japan’s negative interest rate environment, cheap debt financing will be favourable for AGT.

At its current share price, AGT is at 0.7 times price-to-book (P/B) or a 26 percent discount to net asset value (NAV). Comparatively, the whole of S-Reits average a P/B of one time. The discount, at current market price, serves as a good margin of safety for the investors looking to invest in AGT.

Furthermore, AGT’s DPU yield of 8.2 percent is more appealing when compared to the average of 6.7 percent of S-Reits. Consequently, we find that investing in AGT has limited downside and its relative high yield more than compensates for the risk investors undertake.

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