The Japan Times reports Initia Securities is marketing a love hotel fund. Initia Star group also owns Comuei Inc., a leisure hotel management company. Comuei uses the money raised from investors to acquire and renovate leisure hotels, while looking for ways to boost individual hotels' operational efficiency and sales. The emergence of these specialised funds offering high yields signals a continued search by Japanese investors for yield.
Initia Star offers dividends yielding 5-8%, with the investment maturing in three years at which time Initia Star Securities says it will either find a buyer for the hotels or set up a new fund to pay for redemptions.
Initia Star, which is now soliciting investors for a 7th fund, has raised a total of about ¥1.2 billion from the previous six funds. It has paid half-year dividends of 2.53% in the 2nd fund and 2.87% in the 3rd so far. Investors in the first fund have not received dividends yet because of a delay in the opening of a hotel the fund had invested in.
While the returns may appear attractive to retail investors compared to poor yields elsewhere; it seems that the returns offered are poor on a risk adjusted basis. The article quotes Kadokura of BRICs Research Institute saying that land prices are unlikely to fall fast enough to offset the increase in sales and the value of buildings after they are renovated. However, this assumes that the renovation works are properly budgeted and executed and attain the desired uptick in business which would re-value the hotel upwards to at least cover the cost of acquisition and renovation and other costs/fees. It also involves construction risk... as appears has impacted the first fund.
A further concern would be governance; with Initia Star owning the operator and so establishing a structure which is not aligned and subject to conflicts. From the information available, it appears that leverage is not being used; which raises further questions over the review of the reasonableness of original acquisition value; the costs and execution of the renovation project; supervision of the operator and final valuations
The leisure hotel industry itself is well known as a high yielding and counter cyclical industry in Japan with some 37,000 hotels and 3-4 trillion per year in total sales. There is a lot of room in the industry for consolidation. Comuei manages more than 20 love hotels, which makes it one of the largest companies in the industry. The other major players in the industry are -
- Kato Leisure with some 75 hotels http://www.chapel-hotel.co.jp/list.html
- Restay with 48 hotels http://www.restay.com/tenpolist.html
- Will Group in the Kanto area with 32 hotels http://www.hotelwill.com/
- Fine Group in the Osaka area with 28 hotels http://www.hotel-fine.co.jp/
- Urban Resorts Japan with 15 hotels http://www.urbanresortsjapan.jp/
The article quotes leisure hotel operating profit margins as ranging from 20 percent to 30 percent on average for older properties, while more modern hotels have margins of 40 percent to 60 percent.
While this high yielding industry has very interesting dynamics and metrics; it is not clear that the Initia Star product would be paying attractive returns on a risk adjusted basis; considering acquisition, renovation and operational risk.
Source:- http://search.japantimes.co.jp/cgi-bin/nb20100107a1.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+japantimes+(The+Japan+Times%3A+All+Stories)&utm_content=Google+Reader
