Presentations

Financials

Acquisitions supporting revenue and NPI growth. For the quarter ending Sep 2013, Saizen reported a 6.2% and 5.3% YoY increase in its gross revenue and net property income respectively. This was supported by the acquisitions of 5 properties between Nov 2012 and June 2013. We note that Saizen REIT’s Q1FY14 results were broadly within our expectations, with actual revenue and net property income 0.7% and 2% higher than our forecasts respectively.

Stability remains the key element at play. We are continuing to witness improvements in rent reversions from new contracts inked at Saizen REIT. Overall rent reversions of new contracts entered into Q1FY14 was marginally lower by about 0.3% from previous contracted rates (Q1FY13 and Q4FY13: lower by about 1.3% and 0.4% respectively). More notably, rent reversions have improved to positive 0.04% and 0.7% in Aug 2013 and Sep 2013 respectively ‐ an improvement from a negative reversion of 1.9% in July 2013. Average occupancy rates have also held steady at 91.2% in Q1FY14, compared with 91.7% in Q1FY13.

Yen depreciation remains a key risk. As it seeks to minimize the impact of the volatility in the JPY/SGD rate on its upcoming distributions, Saizen REIT has entered into a hedge for its distribution payment ending 31 Dec 2013 at S$81.15/JPY. For the subsequent distribution for the period ending June 2014, it has also been hedged at a rate between a cap of JPY82/S$ and JPY76.18/S$. We currently expect Saizen REIT’s H1FY14 DPU to increase by 8.7% YoY in yen terms. However, this will be offset by a 8.2% increase in the hedged rate compared to the corresponding period in H1FY13. Hence, in S$ terms, we expect Saizen REIT’s H1FY14 DPU to be largely fla

Revenue from acquisitions kicking in. Saizen’s gross revenue and net property income increased by 9.7% and 13.6% respectively in FY13, largely supported by its acquisitions of seven properties. For the sixmonth ending 30 June 2013, Saizen declared a DPU of 0.63 cents, amounting to a full‐year DPU of 1.29c. This is marginally higher than our projected FY13 DPU of 1.24c.

Acquisitions to be immediately yield‐accretive. FY14 will witness the full‐year contribution of Saizen’s recently‐acquired properties. Sitting on a cash pile of JPY6bil, Saizen could tap on its cash balance to engage in immediately yield‐accretive acquisitions. Moreover, Saizen has unencumbered properties valued at JPY2bil, further strengthening its financial clout. We are currently pencilling in JPY2.3bil of acquisitions at a 6% NPI yield.

Visibility of DPU comes at a price. To provide its Unitholders with greater visibility on distributions, Saizen has entered into hedging transactions for its upcoming distributions. The distribution payment for the period ended 30 June has been hedged at an average rate of JPY75.12/S$ and the subsequent distribution is hedged at an average rate of JPY81.15/S$, which compares unfavorably with the current

rate of JPY77.14/S$. This would inevitably weigh on Saizen’s FY14 DPU in S$ terms.

Unit consolidation proposed. Accompanying its latest results, Saizen proposed a unit consolidation involving the consolidation of every five existing Units in Saizen REIT held by Unitholders into one Unit, subject to regulatory and Unitholder approvals. The motivation behind such a proposed move is to reduce the magnitude of a single tick move on Saizen’s share price, and thus its perceived volatility. The share consolidation is expected to be completed in November 2013.

Maintain HOLD on FV $0.195. We rollover our estimates and lower our TP to S$0.195 on the back of a higher risk‐free rate of 2.7%, implying a capital upside of only 6%. In our opinion, Saizen’s current yield level of 7%, which translates to approx. 430 basis points over the risk‐free rate, does not yet sufficiently compensate investors for the inherent macro, forex and interest rate risks. Maintain HOLD.

Current yield presents little room for comfort

YoY revenue up 9.2% in Q313. For the third quarter ending March 2013, Saizen reported a 9.2% and 12.5% increase in its revenue and net property income respectively. This performance was supported by its acquisitions of 8 properties between Mar 12 and Mar 13.

Bearing short‐term pain. Amid aggressive monetary easing measures by the Bank of Japan (BoJ) in a bid to jumpstart its stuttering economy and end deflation, the Japanese Yen has experienced substantial depreciatory pressures in recent months. The Japanese Yen has weakened from JPY/S$64.6 in May 2012 to JPY/S$80.3 currently. Due to a weakening yen, Saizen REIT will inevitably have to bear the near‐term pain of a declining NAV and distributions in S$ terms.

Fundamentals improving in the residential space. We have already witnessed improving rental rates and signs of recovery in the Japanese residential market prior to ‘Abenomics’, and recent monetary easing initiatives are likely to expedite the recovery progress. Given the increasingly favourable macro dynamics, we conservatively raise our rental reversions assumption from ‐1% to 0%

across Saizen REIT’s portfolio.

Going full throttle on acquisitions. Saizen REIT has successfully raised new borrowings of JPY3.8bil and presently has an aggregate debt‐to‐total‐assets ratio of 39%. Given that it has no remaining unencumbered properties, Saizen REIT has limited debt headroom at present and the focus for the REIT will be on acquisition growth in the near future. We have factored in JPY3bil of acquisitions in FY14. The acquisitions are assumed to be completed at 6.5% NPI yield.

We project forward FY13‐14 yields at 5.9‐6.3%. Saizen REIT’s FY13 yield is expected to take a slight dip due to its refinancing costs and acquisition‐related expenses as well as the impact of a weaker yen. However, as the full revenue contribution of recently‐acquired properties is being recognized in FY14 and with further acquisitional growth in the coming quarters, this will lift its yield to 6.4%, according to our projections.

Upgrade TP to S$0.220, Downgrade to HOLD. Despite our higher revised target price of S$0.220, we downgrade our call to HOLD given the limited scope for capital upside from current valuations. Based on our revised FV of S$0.220, this represents a potential capital upside of only 5.8%. Saizen REIT’s recent price appreciation and the impact of a weaker yen have also dampened its attractiveness as a high yield play. We project Saizen REIT’s FY13 yield at 5.9%. This translates to approx. 450 basis points over the risk‐free rate, leaving li

• No wonder that Argyle Street Management, the single largest shareholder of Saizen REIT (with 8.97%) has been a persistent seller of the stock in the past few weeks.
  
• One off refinancing costs as well as the the rapid weakening of the Japanese Yen has caused 3Q to Mar ’13 operating income to plunge 55% yoy and 74% qoq to only S$1.94mln.
  
• And the weakening of the Yen against S$ caused the NAV to fall from 30 cents to 25 cents as at Mar ’13.
  
• With rental collection in Japanese Yen while dividend distributions in S$ as well as the big plunge in operating income, June ’13’s distribution per unit will be negatively impacted.
  
• This suggest down-side risks to its upcoming 6 months dividend distributions expected for half year to June ’13.