Moody’s reviews Saizen for possible downgrade

Reit unlikely to achieve operating scale in its existing rating, says agency

MOODY’S Investors Service has put Saizen Reit’s Baa3 corporate family rating on review for possible downgrade.

Kaven Tsang, a Moody’s assistant vice-president/ analyst, said: ‘The review is prompted by Moody’s expectation that it is unlikely that Saizen can achieve the operating scale that was built into its existing rating when it was first assigned, as the credit and financing market remains tight and could deteriorate further in view of the deleveraging progress evident in the banking system . . . Meanwhile, Saizen stays exposed to a high level of refinancing risk in the fourth quarter of 2009.’

Saizen Reit, which was listed on the Singapore Exchange in November 2007, invests in Japanese regional residential properties.

In a proposed rights issue announcement dated Dec 31, 2008, the trust’s manager said that in order to conserve cash, it may as a temporary measure consider significantly reducing or suspending dividend payouts in cash until refinancing plans become clearer and financial conditions are more satisfactory.

On Jan 13, the manager further proposed a scrip-only dividend scheme, subject to unitholders’ approval, to ‘provide the flexibility for Saizen Reit to pay out part or whole of a dividend by way of new scrip dividend units (in the event that a dividend is announced) and allows cash to be conserved for loan repayments’.

Saizen Reit’s unit price has fallen from 82.5 cents on Feb 26 last year to its last traded price yesterday of 10.5 cents.

In Moody’s release yesterday, Mr Tsang, who is also lead analyst for Saizen Reit at the ratings agency, observed that internal reserves – including an estimated 5.7 billion yen (S$96.7 million) in unrestricted cash as at December 2008 – and about 2.5 billion yen in expected proceeds from a recently announced rights issue, are more than enough to cover Saizen Reit’s maturing debt in the first half of 2009.

‘However, it still has to secure additional financing to meet a total of 13.4 billion yen in maturing CMBS (convertible mortgage- backed securities) due in the fourth quarter.’

The proposed rights issue is subject to approval by regulatory bodies and independent unitholders.

‘The tightened state of the global credit environment and the distressed state of the banking sector add material uncertainty to Saizen’s refinancing process, while it is also exposed to the weakening operating environment as Japan moves into recession,’ Mr Tsang said.

Moody’s last rating action for Saizen Reit was on Nov 28 when the outlook was revised to negative.

Saizen Reit proposes rights-cum-warrants issue

SAIZEN Reit has proposed a renounceable non-underwritten rights issue with free detachable and transferrable warrants in a bid to raise $44.75 million to pay off loans and fund its operations.

The proposed rights issue is for up to 497.2 million new units in the trust at an issue price of nine cents each, on the basis of 11 rights units for every 10 units held, according to Saizen Reit manager Japan Residential Assets Manager (JRAM).

The free detachable and transferrable three-year warrant that comes with every rights share can be exercised at the same price. This means Saizen Reit will receive an additional $44.75 million if all 497.2 million warrants are exercised. In a regulatory filing on Wednesday, JRAM said that the rights issue price of nine cents represents a discount of 30.8 per cent to Saizen Reit’s last-traded price of 13 cents on Wednesday.

The company plans to use the proceeds from the rights-cum-warrants issue to repay loans and for ‘general operational purposes’.

‘While operations of Saizen Reit have been stable, reflecting the underlying strength and resilience of its residential portfolio, lenders generally favour lower leverage under the current credit environment,’ said Chang Sean Pey, chief executive officer of the manager.

Saizen Reit has 5.28 billion yen (S$82.8 million) in loans due in April this year, but said that it has sufficient cash to repay the amount. However, the trust has another 13.4 billion yen in loans that are set to mature in November and December.

Nine sets of shareholders have given irrevocable undertakings to subscribe for their respective rights-cum-warrants entitlements and mop up any rights shares that remain unsubscribed.

These include Argyle Street Management, which owns 11.5 per cent of Saizen Reit, and JRAM directors Arnold Ip, Chang Sean Pey, Raymond Wong and Yeh V-Nee. Non-shareholders Amherst Holdings Equal Chances have made similar commitments.

The rights-cum-warrants issue is subject to approval by the Securities Industry Council and the Singapore Exchange.

Saizen Reit’s acquisitions on hold; distribution per unit is 4.67 cents

SAIZEN Reit, which was listed on the Singapore Exchange in November last year, says it will hold out on new acquisitions for the present.

Arnold Ip, chairman of the Reit manager, Japan Residential Assets Manager Ltd (JRAM) said: ‘While there are attractive investment opportunities for Saizen Reit, the manager intends to adopt a cautious approach for the time being to conserve cash and financial flexibility, and do not envisage acquisitions in the short term.’

He added that priority will be given to financial management.

The announcement came yesterday when it also announced that distributable income for the financial year ended 30 June 2008 was $22.13 million. Distribution for the period is 4.67 cents per unit.

At the time of listing, Saizen Reit had an initial portfolio of 147 residential rental properties in regional cities in Japan. This has since increased to 166 properties in 13 Japanese cities.

As at June 30, the Reit’s portfolio was valued at $629.8 million.

Compared with FY’07, gross revenue in FY’08 increased by 87.2 per cent due to the increase in number of properties over these periods. There were 101 and 166 properties respectively at the start and end of FY 2008, while there were 62 and 101 properties respectively at the start and end of FY 2007.

Net property income increased from $18.37 million for FY’07 to $32.42 million in FY’08.

Saizen Reit did record a loss after income tax of $48.68 million in FY’08 compared with a profit of $26.86 million in FY’07. This was attributed to net depreciation in the value of investment properties of $59.8 million, one-off IPO expenses of about $10.5 million and exchange losses of around $4.2 million.

Based on the closing market price on August 26 of 50.5 cents per unit, the distribution yield was 9.2 per cent.

Raymond Wong, executive director of the Reit manager, noted that its share price had been beaten down recently – partly due to the downturn in the Japanese real estate market and news of the collapse of large Japanese developers like Urban Corporation.

But he pointed out the Reit had taken steps to strengthen its financial position to weather the next 12-months at least. ‘While also affected by the credit crunch, Saizen Reit has maintained adequate resources to repay loans falling due within the next 12 months while keeping net gearing ratio at about 36.5 per cent,’ he added.

To this end, Saizen Reit manager JRAM also announced yesterday an agreement with a European bank for a three-year term loan of $75.7 million collateralised by 38 existing properties.

Partial drawdown of the loan has taken place at a fixed interest rate of 2.67 per cent, representing a reduced rate compared with interest rate of the existing loan of 3.02 per cent.

At the operating level, occupancy rate stood at 91.4 per cent as at June 30 compared with 89.4 per cent as at December 31, 2007. Delinquency in rental collection is less than 0.03 per cent of revenue. Net property income yield is at approximately 6 per cent, providing Saizen Reit with an interest cover ratio of about 3.7 times based on its current level of borrowings.

Sean Pey Chang, CEO of the Reit manager, also said that it expects leasing activity and rental performance to be stable. Net property income in the quarter ended June 30 was $9.54 million, down marginally by 2.9 per cent from the previous quarter.

He also added that in the cities in which Saizen Reit is exposed, including Sapporo, Fukuoka and Kitakyushu, homeownership is only about 55 per cent.

Saizen Reit’s rental properties are targeted at the mass market and average rents are about US$1-US$1.50 psf.

At the end of trading yesterday, Saizen Reit’s unit price was 55 cents per unit, up 4.5 cents.

Stabilising action by Morgan Stanley,

• 7-Dec-07 : Cessation of Stabilising Action – To date purchased a total of 27,250,000 Units ; Over-allotment option has been exercised partially, in respect of 2,261,000 Units
• 7-Dec-07 : 1,015,000 Units @ $0.935
• 6-Dec-07 : 599,000 Units @ $0.935
• 5-Dec-07 : 76,000 Units @ $0.935
• 4-Dec-07 : 119,000 Units @ $0.935
• 3-Dec-07 : 1,487,000 Units @ $0.935 to $0.94
• 30-Nov-07 : 429,000 Units @ $0.91 to $0.925
• 29-Nov-07 : 97,000 Units @ $0.91ct
• 28-Nov-07 : 1,004,000 Units @ $0.91
• 27-Nov-07 : 2,290,000 Units @ $0.9105
• 26-Nov-07 : 1,000,000 Units @ $0.92
• 22-Nov-07 : 500,000 Units @ $0.875
• 21-Nov-07 : 1,667,000 Units @ $0.875
• 20-Nov-07 : 1,230,000 Units @ $0.875
• 16-Nov-07 : 500,000 Units @ $0.865
• 14-Nov-07 : 500,000 Units @ $0.845
• 13-Nov-07 : 2,000,000 Units @ $0.85
• 12-Nov-07 : 3,133,000 Units @ $0.85
• 9-Nov-07 : 9,604,000 Units @ $0.835 to $0.94

Note : Total 29,511,000 Units available for Stabilising Action

Issue statistics

Offer size: 196.7m new shares(subject to the Over-allotment Option)
Public Tranche – 18.5m shares
Placement Tranche – 178.2m shares
Price: S$1.00

NAV per share (post-IPO): ￥79.78 (S$1.05)
Market Cap (post-IPO): S$472m

Open: 30 October 2007, 12.00 noon
Close: 5 November 2007, 8.00 a.m
Trading: 9 November 2007, 2.00 p.m

Lead Manager: Morgan Stanley, Credit Suisse

Background

Saizen REIT’s portfolio comprises 148 Initial Properties located in 12 regional cities throughout Japan with a total appraised value of ￥47.7 billion (approximately S$626.8 million). As at 31 August 2007, the Initial Properties have a total Gross Floor Area of 226,250 sq m, a total Net Lettable Area of 197,743 sq m and an occupancy rate of approximately 91.2%. Occupancy rates shown below are as at 31 August 2007.

Potential acquisition of 15 Additional Properties with a total indicative purchase consideration (excluding transaction costs) of approximately ￥5.4 billion (approximately S$71.4 million). Also considering the acquisition of over 40 properties worth approximately ￥20 billion (approximately S$263.0 million).

Saizen REIT’s distribution policy is to distribute at least 90.0% of Saizen REIT’s Distributable Income in each financial year. For Forecast Period 2008 and Projection Year 2009, Saizen REIT, to the extent possible, will distribute Distributable Income in excess of 90.0% in order to meet the Manager’s forecast and projection set out.

Forecast Yield

Forecast Period 2008 – DPU 4.67ct ; Annualised Yield 6.51%
Projection Year 2009 – DPU 5.65ct ; Yield 5.65%

Reference : IPO Prospectus