Saizen – AmFraser

Snapping Up Yield‐Accretive Acquisitions

Carrying out its inorganic growth plans. Saizen REIT’s TK operator Godo Kaisha (GK) Gyokou has, on 30 November 2012, entered into a sale and purchase agreement for the acquisition of Rise Shinoe (RSO) for a cash consideration of JPY 285mil (S$4.2mil). RSO is located in the Central Ward of Kumamoto City and is within 10‐minutes walk from train and bus networks. RSO was built in June 2003 and comprises 34 residential units and 19 car parking lots. RSO is currently generating annual revenue and net property income of approximately JPY 27.0 mil (S$0.4 mil) and JPY 19.3 mil (S$0.3 mil) respectively, which are equivalent to about 0.8% of both Saizen REIT’s annual revenue and net property income in the financial year ended 30 June 2012.

A positive step. The acquisition of RSO is a positive step for Saizen REIT. Noting that Saizen REIT is backed by a cash hoard of JPY4bn (S$59.2mil), we previously highlighted in our initiation report that Saizen has the firepower to engage in yield‐accretive acquisitions and initiatives to grow inorganically will only translate into improving momentum in its top‐line.

Acquisition complementary to existing strengths. While the acquisition of RSO translates into an increased reliance on Kumamoto – revenue contribution from Kumamoto following the acquisition has increased from 17.7% to 18.3% ‐ we view this as a strategic move given RSO’s accessibility to transport networks, young building age and high occupancy rate of 98% (by revenue). Evidently, these characteristics are complementary to the strengths of Saizen REIT’s overall portfolio. The acquisition would lower the building age of Saizen REIT’s overall portfolio as well as improve its portfolio’s average occupancy rates.

Acquisition of RSO likely to be yield‐accretive. According to Saizen REIT’s announcement, the net operating income yield of RSO is around 6.8%. Given that the acquisition is expected to be financed entirely by cash, we expect the acquisition to be yield‐accretive. Saizen REIT’s current dividend yield is at 7.3%.

Cash hoard to support Saizen REIT’s acquisition appetite. Saizen REIT’s estimated cash balance of JPY3.3bil (S$49mil), after factoring in the acquisition and debt amortization, should continue to equip it with the financial muscle to engage in further yield‐accretive acquisitions. We raise our fair value for Saizen REIT to S$0.213 and reiterate BUY.