Deep-dive 2021-4: Ichigo Hotel REIT Investment Corporation

Ichigo Hotel REIT Investment Corporation (3463 JP) is a Japanese hospitality REIT run by American hedge fund manager Scott Callon. It invests in lodging-focused hotels in major cities across Japan with a major focus on tourism.

The REIT was formed by sponsor Ichigo Inc, an asset management company run by Callon after he took over the company in 2008. Ichigo now manages three REITs: Ichigo Office, Ichigo Hotel and Ichigo Green. Ichigo's business model is to acquire assets at a discount using low-cost debt and then improve the assets over a period of 2-3 years. Callon has a reputation for treating minority shareholders well. Ichigo Hotel REIT is unusual among Japanese hospitality REITs in that it does not engage in empire building. The share count has been stable over the past few years and Scott Callon has said that he is not willing to issue new shares below book.

The assets themselves are of decent quality. They are well managed budget hotels relying on online travel agents for room distribution. Hotel review scores on are high across the board.

Part of the attractiveness about Ichigo Hotel REIT is the borrowing cost of 0.8%. Smaller developers or property managers do not have the ability to finance acquisitions at 1%. There is still borrowing capacity before hitting the self-imposed target of 60% LTV. While there is a certain amount of leverage in the business, banks tend to be supportive and the REIT is not facing any major maturities before FY2023/24.

The financials have been hit hard by COVID-19 related lockdowns and travel restrictions. Occupancy was temporarily down over 50% with room rates down a third as well, before recovering in mid-2020. The Japanese government's "Go To" travel subsidy program that was launched in July 2020 helped the industry recover, but the number of nights stayed across the industry is still down by over 30% vs 2019 levels.

We think that domestic tourism in Japan will gradually recover throughout the next 4-6 months as Japan's population gets access to vaccines for COVID-19. If Tokyo Olympics goes ahead as planned in July / August 2021, then that would be an added bonus for the business. International tourism will take longer to recover, but should recover almost fully by FY2023.

Ichigo Hotel REIT's stated NAV/share is around JPY 133,000. Our own calculations put the NAV/share at JPY 139,000, implying an upside of +60% from today's share price of JPY 86,800. The two major uncertainty factors are how fast RevPAR can recover, as well as the cap rate used to capitalise property-level NOI. Transactions prior to COVID-19 were done at cap rates well below 4%. Over the past half-year, we have seen cap rates closer to 5.5-6.0%. Our NAV assumes that hospitality asset cap rates will eventually reach the 5% level. Our NAV implies a P/FFO of about 16x, P/B of 1.1x and a dividend yield of 6.4% - levels that we are relatively confident that Ichigo Hotel REIT will achieve.

The major catalysts to look out for include Japan's COVID-19 vaccine roll-out, Tokyo Olympics, cross-Asian travel restrictions easing and the potential for the Bank of Japan to acquire REITs using its own balance sheet.

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The above article and PowerPoint presentation constitutes the author’s personal views only and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. The author may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. Disclosure – we hold a position in Ichigo Hotel REIT at the time of publishing this article (this is a disclosure and NOT A RECOMMENDATION).

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