Saizen Reit aims to resume dividend payments in June 2010

In the meantime, all operating cash flow will be used to service CMBS loans

SAIZEN Real Estate Investment Trust (Reit), which recently suspended dividend payments to unitholders to conserve cash, hopes to resume payments by June 2010 at the latest.

In the meantime, all operating cash flow will be used to service its commercial mortgage backed securities (CMBS) loans, it said.

‘We are very clear on our mandate,’ Raymond Wong, executive director of the Reit’s manager, told BT. ‘A Reit is a yield vehicle. We are fully aware of this and we want to keep paying dividends at all cost – but these are exceptional times.’

The trust, which is looking to raise net proceeds of $41 million through a rights issue, says it should have paid off five of its six CMBS loans by June 2010, after which it can use its property income to resume paying dividends.

The Reit will draw on cash reserves, proceeds from its rights issue, operating cash flow and a short-term bridging loan to pay off five CMBS loans worth some 12.2 billion yen (S$187.95) million in all. For the sixth CMBS loan, worth 7.95 billion yen, Saizen is looking for refinancing through a possible syndicated loan.

Mr Wong hopes that once the 12.2 billion yen CMBS loans are paid off, the assets used to secure those loans – which will then all be unencumbered – can then be used to secure refinancing for the sixth. In the worst-case scenario, if no refinancing can be found for the sixth loan, the trust may have to forfeit properties worth 10.3 billion Japanese yen, which were used as collateral for that CMBS loan tranche.

The trust also has another 6.68 billion yen of traditional bank loans due from 2011 onwards.

Management is trying to ensure the survival of the Reit, Mr Wong said. ‘We are really making an effort to explain to shareholders that by holding back the dividends and with the rights issue, we will ensure survival and also protect at least 90 per cent of the (portfolio) value.’

The trust, which derives its income from rental properties in Japan, said in February that it was not declaring any distribution for Q2 2009.

Prior to that, it put out a proposal that would allow it to pay dividends in the form of Reit units – rather than cash – but later said it would not proceed with this scrip dividend scheme. Mr Wong yesterday said the plan was abandoned after deliberations with the Singapore Exchange.

The Reit, which has a portfolio of 166 buildings with 6,000 rental homes in Japan, said rents and occupancies across its largely mass-market properties have remained stable since the current crisis began.

‘In the past 18 months since our listing, we have delivered results,’ said Mr Wong. The trust saw gross revenue and net property income rise by 24.5 per cent and 24.7 per cent respectively in its Q2 2009 quarter compared with a year earlier, due to an increase in the size of its portfolio. ‘The one big problem we are facing is the refinancing,’ Mr Wong said.

Saizen Reit was hit when the market for CMBS products collapsed in 2008 at the onset of the current crisis.

When building up its portfolio in the years leading up to its 2007 listing, Saizen relied solely on CMBS to finance its buying. But the CMBS market shut down at the beginning of 2008.

The trust had already changed some of its loans to traditional bank loans by then, but the crisis meant bank loans dried up, leaving it with six CMBS loans.

Moody’s Investors Service yesterday downgraded Saizen Reit’s corporate family rating to Ba3 from Ba1. The rating remains on review for further possible downgrade, the agency said.

Moody’s lowers Saizen; review for possible downgrade

Moody’s Investors Service has downgraded Saizen REIT’s corporate family rating to Ba3 from Ba1.

At the same time, the rating remains on review for further possible downgrade.

‘The downgrade reflects Saizen’s rising liquidity pressure with the presence of material refinancing risk in 4Q2009,’ says Kaven Tsang, a Moody’s AVP/Analyst.

‘While Saizen has suspended dividend payouts to preserve liquidity and is conducting a rights issue to address part of the refinancing needs, a significant portion of the maturing CMBS still does not have any committed funding arrangements. This material liquidity exposure will position Saizen more appropriately at the Ba3 rating level,’ he adds. Mr Tsang is also Moody’s lead analyst for the trust.

‘The slow process in refinancing and the narrow nature of its banking relationships would further increase Saizen’s exposure to market uncertainties, in view of the tightened nature of the global credit environment and the distressed state of the banking sector,’ he said.

‘Meanwhile, Saizen is exposed to the weakening in the operating environment and asset devaluation risk, as Japan’s recession deepens.

‘The latter could narrow the headroom for loan covenant compliance.’

Partly mitigating these concerns is the fact that its properties are in cities whose rental housing markets display fairly stable histories, even during the downturns of the late 1990s and early 2000s.

Saizen’s rating remains on review for possible downgrade and the review will focus on the company’s abilities to raise committed funding to address the unfunded portion of the maturing CMBS in 4Q2009 against the backdrop of turbulence in the financial markets.

Further downward rating pressure would evolve if Saizen’s liquidity position weakens, in the event that 1) Saizen fails to complete its rights issues, and 2) there is no material progress in securing committed funds — over the next 2 months — to refinance the unfunded portion of the maturing CMBS in 4Q 2009.

The last rating action was on 26 February 2009 when Saizen’s rating was downgraded to Ba1 and Moody’s continued its review for further possible downgrade.