The forgotten child!

Company Overview

Saizen REIT is a Singapore-based REIT. Its mandate is to invest in a diversified portfolio of income-producing real estate which is primarily used for residential and/or residential-related purposes in Japan

• On a property tour to visit six residences in Fukuoka, Kumamoto and Hiroshima, Japan
  
• Residential property is good property asset class in Japan with stable and resilient cash flow
  
• Japan residential property prices are firming up No rating on the stock
  

What is the news?

We visited six residences under the portfolio of Saizen REIT in Fukuoka, Kumamoto and Hiroshima, Japan in December. These properties are conveniently situated in major commercial and entertainment areas, or towns near transportation networks connecting to major business and commercial centres or close to educational institutions. The building age of these residences range from 6-month to 23-year old and thus provided us a good sense of the condition of the newer and older buildings.

How do we view this?

The condition of the properties from the interior to exterior of the building was well-maintained and some of the rental unit is fully-furnished and equipped with electrical appliances and other fittings which can command a premium. Having said that, we believe the rental units will be highly sought after among tenants given the tip-top condition and easily accessible to places for work, play and learn.

Investment Actions?

Japan residential property seemed to hit the rock-bottom with limited downside. Cap rate is tightening marginally for some cities. This is evidenced by the modest increase of 0.8% for the valuation of 130 portfolio properties in FY12. We opine the worse could be over for Japan residential market. Saizen REIT’s borrowing cost and loan tenure are improving over time since global financial crisis. The management will continue to deepen the relationship with existing lenders and forging new ones to achieve lower interest cost and establish new loans for future acquisitions. Furthermore, the warrant proceeds can be used to perform share buyback which is DPU accretive. For investors who want to have exposure in Japan residential market, they can consider Saizen REIT over Japan Rental Housing Investments Incorporation (listed on TSE) on the thesis of yield compression. Weakening Japanese yen may not be favorable to Saizen REIT but Forex lines could be employed to hedge the depreciation.

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.

Saizen Real Estate Q3 net property income slips 10.5%

Saizen Real Estate Investment Trust (Saizen) reported a 10.5 per cent loss for Q3 2012 in its net property income to S$9.14 million (573.25 million yen), from S$9.94 million a year ago, in a press release on Thursday.

Its net income from operations for Q3 showed a bigger loss as it fell by 21.4 per cent to S$4.16 million, from S$5.15 million a year ago.

Earnings per unit were at 0.13 Singapore cents (0.08 Japanese yen), a decrease from 0.65 Singapore cents (0.42 Japanese yen) a year ago.

Net asset value as at March 31 2012 was tagged at 0.31 Singapore cents (20.01 Japanese yen).

Saizen may get rating boost on clearing defaulted debt

SAIZEN Reit’s corporate family rating is up for a possible upgrade to positive by Moody’s following its plans to repay a loan that went into maturity default in November 2009.

‘The repayment plan is a positive action in resolving the defaulted commercial mortgaged-backed-securities loan of YK Shintoku,’ said Moody’s senior vice-president Philipp Lotter.

The manager of the purely Japanese Reit play said on Wednesday that the 4.2 billion yen (S$62 million) outstanding loan balance under its YK Shintoku portfolio can be repaid by the end of May this year.

The loan had been in default due to the collapse of the commercial mortgage-backed securities market in Japan in 2008. Since then, Saizen has been repaying the loan from its operational cash flow and the sale of its property assets.

Moody’s last revised Saizen’s Caa1 corporate family rating in June 2010 from negative to stable.

In this review of Saizen Reit’s outlook, Moody’s will consider Saizen’s credit profile after the loan repayment, its ability to access funding and the extent of damage the Japanese earthquake and tsunami has wreaked on Saizen’s Japanese properties.

Moody’s observed that after the defaulted YK Shintoku loan is settled, the next material debt of 5.7 billion yen would mature in 2013.

‘Moody’s estimates that Saizen has unencumbered assets of around 11.5 billion yen which are available to repay the YK Shintoku loan and other maturing debts,’ it said yesterday.

Saizen Reit’s manager laid out a repayment schedule that spans across three instalments, mostly through cash, but also through proceeds raised from property sales under three portfolios: YK Shintoku, YK Shingen or YK Keizan.

Saizen’s first repayment of at least two billion yen will be in cash on April 11. Between April 12 and May 30, there will be a repayment of about 800 million yen from property sales proceeds. Saizen will repay the difference – about 1.4 billion yen – with internal resources.

The Saizen Reit counter closed trading unchanged at 15 cents yesterday.