Activist Investor Targets Tokyo Gas Over Hidden $9.7 Billion Real Estate

Tokyo Gas has been experimenting with new energy sources as it struggles to reduce its carbon footprint.

Tokyo Gas will release its annual report to shareholders this week, which could be the first chance for Japan’s largest gas company to announce its plan for a massive, multibillion-dollar estate portfolio that activist Elliott Investment Management believes could be worth up to 1.5 trillion yen ($9.7 billion).

Japanese utilities had to own infrastructure close to the consumers, so Tokyo Gas also owned a significant urban real estate. Companies like Kansai Electric Power Co. and Osaka Gas Co. have similar expansive portfolios.

Since it is a giant in the industry and owns real estate in and around prime Tokyo areas, it is a good candidate for improving capital efficiency.

For example, it used to have a plant in Toyosu, which is now the location of the primary fish market in Tokyo and an area that is currently undergoing development to become a zero-carbon town.

It also owns assets that make headlines, such as Shinjuku Park Tower, which was constructed on top of a former gas storage facility and contains the Park Hyatt Tokyo hotel. Shinjuku Park Tower also appeared in the 2003 movie Lost in Translation.

Travis Lundy, a Japan markets specialist who publishes on the SmartKarma platform, states that Tokyo Gas may reduce cross holdings and real estate held for investment purposes before distributing the proceeds to shareholders if it chooses to act on Elliott’s demands.

According to Lundy, Tokyo Gas is operating a long/short fund, shorting its stock to finance long positions in securities holdings and real estate valued between 600 billion and one trillion yen.

Elliott disclosed a 5% stake in Tokyo Gas last week and wants the company to sell its multibillion-dollar portfolio unrelated to its primary energy business.

The fund has concentrated on the gap between the book value of properties and their potential price if they go for sale.

According to a September Goldman Sachs study, Tokyo Gas has unrealized real estate gains of 447 billion yen, the largest among its peer group. It is slightly more than a fourth of its current market capitalization.

The group’s shares increased after Elliott’s disclosure and maintained most of those gains, closing Tuesday at 4,389 yen, indicating that investors expect to see some changes to happen.

While the company valuation multiples are broadly in line with the industry, its return on equity, which measures how well a business makes its profit, is currently just under 4% on an adjusted quarterly basis. It is lower than peers like Osaka Gas, which has a return of over 7%.

In a note earlier this week, Syusaku Nishikawa, an analyst at Daiwa Securities Co., stated that while the company’s reputation as a stable gas company helps it secure affordable financing for the real estate arm, it may take some time for them to come with a comprehensive response.

Nishikawa stated that as the business was at $9 billion in May, unrealized profits from other ventures, such as its collaboration with Octopus Energy, might become evident.

The urban business segment covered a tenth of Tokyo Gas’s earnings last year and has progressively improved and helped stabilize the energy industry.

Tokyo Gas has been experimenting with new energy sources as it struggles to reduce its carbon footprint.

It has invested in synthetic methane fuel and expanded the production and use of hydrogen, which will need significant investment to become economically viable.

Tokyo Gas was established in the late 1800s to control the city’s gas distribution. Since then, it has expanded to cover 30% of the Japanese market. The company also has many energy projects abroad, such as developing gas-fired power stations in Southeast Asia, purchasing an American company to spread shale gas, and investing in an offshore wind fund in the UK.