Babcock & Brown Japan Property Trust (BJT) said the fair value of the total portfolio has decreased by 13.3% or $1.6 billion as at 30 June 2009 following independent revaluations of all of the trust’s properties. The company attributed the cuts to difficult economic conditions.

Senior advisor to the board of BJT, Eric Lucas, said challenging economic conditions in the first half of 2009, including the worst negative GDP number in over 50 years, have translated into valuers applying higher average capitalisation rates and lower assumed cash flows to our portfolio.

“Despite the soft operating environment however, BJT’s portfolio is approximately 94% occupied by income as at 30 June 2009, only slightly down from 96% as at 31 December 2008,” Mr Lucas said.

“Importantly, even after these revaluations, BJT remains in compliance with both of its gearing ratio covenants.”

Mr Lucas added that BJT only has two covenants affected by valuations, one contained in its foreign exchange hedging contract and the other in one of its separate property-level loan arrangements.

“As at 30 June 2009 the Trust’s interest coverage ratio remains high at approximately 3.7x,” he said.

The trust said the devaluation of the Trust’s portfolio was equally driven by increased capitalisation rates and reduced asset-by-asset cash flow assumptions used by the valuers.

As a result of the decreased portfolio value BJT’s current gearing ratio has increased to 69.4%, with the trust adding that the board remained committed to returning gearing to its long-term target range of 50-60%.

Mr Lucas said the trust was negotiating for greater certainty and clarity with its foreign exchange hedge counterparty in the context of ongoing de-emphasis on hedging which began 12 months ago.

“Since that time we have reduced capital hedging by half and distribution hedging by about one third,” Mr Lucas said. 

As at 1047 AEST, Babcock & Brown Japan Property Trust shares were down 2.5c to 35c.