Saizen – AmFraser

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