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The Listed Property Trust (LPT) sector has taken its fair share of punishment over the past year and Babcock & Brown Japan Property (JPT) Trust has been no exception, falling by more than 85 per cent in less than two years. The decline has coincided with one of the sharpest quarterly falls in Japan's gross domestic product since 1974.

Despite the gloom, the trust's operational performance has been in stark contrast to unit-price performance. For the six months to December 31, 2008, its net property income rose to $54.4 million, up 53 per cent on the 2007 first half, mainly on the back of property acquisitions and a strengthening yen.

Weighing on the share price have been ongoing concerns BJT could breach loan covenants and that a large placement may be necessary. Also not helping has been the collapse of Babcock & Brown, the current manager of the BJT. The half-yearly dividend was reduced from 6 cents to 4 cents, with capital retained in the business to potentially fund a buyout of the management contract from B&B.

The Outlook

BJT has an interest cover ratio of nearly four times and a property portfolio valued at more than $1 billion above existing debt levels. Derivative contracts are in place that protect the capital position and distribution payments from adverse currency movements.

While Japan's economy is facing challenging times, the domestic property prices have corrected sharply in a lengthy bear market since 1990. Commercial yields of about 5 per cent compare favourably to official interest rates of close to zero per cent. Gearing in the trust is about 57 per cent; while not conservative, this is still below any loan-covenant triggers.

Asset sales to reduce the gearing are probable this year and would remove a considerable weight on the share price. Additionally, a potential opportunity to internalise the management contract could add value for unit holders by lowering the management expense ratio.

Price

BJT has confirmed a first-half distribution of 4 cents, financed through operating cash flows, which places the units on an annual yield of 15 per cent, even in the absence of a final payment. Moreover, the trust's actual distributable income for the period was 6.3 cents and management reaffirmed guidance of more than 13 cents for the full 2009 year. The trust trades on a price-to-book ratio of less than 0.20 times, highlighting its undervaluation.

Worth buying?

While there is obvious risk to the current dividend yield, the current market value discounts a considerably more pessimistic outlook than is likely to occur. While a recovery in the next few weeks is not anticipated, there are a number of potential catalysts that could trigger a re-rating this year. BJT is not really an attractive proposition for short-term traders but one to consider for longer-term investors.