Saizen REIT

[Zelphon]

Today's article on Saizen Reit featured in Next Insight...

http://nextinsight.net/index.php/story-a...-975-yield

If the yield is 9.75% above the 7% as mentioned by D.O.G...
Don't you still think this is a undervalued GEM?

[momoeagle]

Article from next insight to share:
http://nextinsight.net/index.php/story-a...-975-yield

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THE RECENT GREAT response to Global Logistics Trust and Mapletree Logistic Trust IPO prompted me to do a simple analysis on Singapore REITs to identify REITs that could still be undervalued.

The SREIT average yield is 6.52% with the market leaders in term of asset size like A-REIT trading at a rich 30% premium to book value.

REITs that are currently trading below book value are AIMSAMPIReit, Cambridge, LippoMapletree, Suntec, Saizen, FraserComm, Fortune and Starhill Global (see table below).

The REIT that caught my attention is SAIZEN Trust.

Saizen is currently trading at steep discount to book value with a P/B ratio of only 0.40.

In simple terms, we are using $0.16 cash to purchase $0.40 in value of housing properties in Japan which are giving a yield of 9.75%. It looks very attractive compared to the near 0% fixed deposit offered by banks in Singapore.

379_saporo
If all of Saizen's properties (NTA) are sold in the market today, they could yield $0.384 per share cash vs $0.16 market price of Saizen on the stock market.
The following are interesting facts extracted from its AGM presentation:

Assets and Loan

Saizen REIT can be viewed in two parts:

* * "Healthy" part accounts for about 79% of Group assets and 91% of Group

* NAV Defaulted part accounts for about 21% of Group assets and 9% of Group

* NAV Cash flow from "Healthy" part is freely distributable to investors.
* * If the YK Shintoku loan issue is resolved, this represents a "bonus" to investors.

Healthy part 91% of Group NAV = $0.364 per share still a great discount to market price $0.16

Resumption of Distribution

* FY2010 distribution of 0.26 cents per Unit, in respect of 2 months' cashflow
* Distribution represents operational cash generated from 8 "healthy" subsidiaries (ie. excluding cash flow of YK Shintoku)
* Distribution of cash generated from "healthy" part of the REIT is expected to continue

Annualised dividend is 1.56 cents a share, giving a 9.75% yield based on $0.16 price of Saizen units on the open market.

YK Shintoku loan

* Maturity default in November 2009
* Commenced discussions with financial institutions on potential refinancing of loan; any refinancing has to be on reasonable terms.
* Unencumbered properties of JPY 12 billion available as collateral for new loans.
* No indication of foreclosure actions to-date
* Asset manager continues to work closely with the loan servicer (including divestments)

214_changseanpey
Chang Sean Pey, CEO, Saizen, has been buying the REIT's units.
Total Net Outstanding Loan JPY 5.3 Billion vs Unencumbered properties of JPY 12 billion.

Property operations and portfolio value

* * Property operations has been stable and is expected to remain stable
* * Average occupancy rate of 91.7% in FY2010
* * Tenant turnover improved from 22% in FY2009 to 20% in FY2010
* Overall rental reversions of contracts entered into during FY2010 were at rental rates which were marginally lower (by 4.3%) than previous rates
* Portfolio value remained stable compared with June 2009

Both Value and Rental Income are expected to remain STABLE

Divestments

* Partial and progressive divestment of YK Shintoku properties to facilitate refinancing of YK Shintoku's loan.
* Divested 5 properties in FY2010 and a further 9 properties in FY2011to-date
* Total sale price JPY 1,953.5 million
* Sale prices were at a weighted average discount of 4% to valuation
* Assets proven to be liquid even at depth of crisis.

Divested properties were at a weighted average discount of 4% to valuation.
Assuming all properties (NTA) are to be sold in the market today, we will be getting back $0.384 per cash vs $0.16 market price.(Adjusted for Warrant = $0.32 x 96% =$0.30)

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I learned a lot too.

D.O.G-san, your ability to pull out relevant info from all sorts of places and combine them into a succint piece never ceases to amaze me.

That was really an excellent post.

[d.o.g.]

If the yield is 9.75% above the 7% as mentioned by D.O.G...
Don't you still think this is a undervalued GEM?

9.75% is on an undiluted basis. Since the warrantholders are in the money (exercise price: 9cts) it is likely that most if not all the warrants will be converted. The warrants represent 50% of outstanding units, so upon conversion there will be 1.5 times as many units. Same cash distribution dividend by more units = lower DPU. 9.75% / 1.5 = 6.5%.

The warrants expire on 2 Jun 2012. Realistically speaking, there will probably be only 3 more distributions before the warrants expire/convert: for the periods ending 31 Dec 2010, 30 Jun 2011 and 31 Dec 2011. If the managers are nice, they may do an interim distribution for the 5 months to 2 Jun 2012.

So at most, a unitholder today will get 9.75% yield for 23 months, and after that he will get 6.5% - assuming that distributions (on an absolute basis) remain flat.

Given the flat or declining outlook in the real estate investor survey, future renewals and thus distributions will probably be lower. Saizen's recent renewals were 4.3% lower, even worse than suggested by the real estate investor survey.

It would be sensible to expect future distributions (in absolute yen terms) to be at least 3-4% lower than the most recent distribution. This is before factoring in any decline in the Japanese yen, which looks increasingly likely given the domestic debt load and exporter pressure on the government.

There are plenty of arguments out there about why the yen is likely to depreciate in future. I would be very interested to read a coherent counter-argument on why the Japanese yen should appreciate in future. If nobody can come up with anything that supports the strong-yen argument, maybe it would be wise to expect that the weak-yen scenario is likely to happen i.e. Saizen REIT unitholders should expect lower future distributions in SGD terms.

[sgd]

thanks d.o.g for that excellent piece of market intel.

The reit may not be performing at the optimum 7.2% as you mention but 6.5% is still good yield for a 16 cent reit that is worth 40cts(or even 34 cents) down from IPO days of a dollar and operating in a market that is also undervalued.

The property prices may or may not go further down as you put it "nobody knows" and being undervalued does not automatic mean it's a bargain but think I feel safer buying into this than buying into other markets that look like overvalued bubbles that "nobody knows" also when they going to burst.

could still be early days but as long as they continue to make effort and pay out consistent dividend I think holding power should be alright. Also another thing is the directors and especially some of their wives are stumping up their own money for shares in the company that's not something you see often.

I guess not for everyone in the end is up to each individual comfort level.

[d.o.g.]

The reit may not be performing at the optimum 7.2% as you mention but 6.5% is still good yield for a 16 cent reit that is worth 40cts(or even 34 cents) down from IPO days of a dollar and operating in a market that is also undervalued.

Based on the Japan Real Estate Institute investor survey, a portfolio of performing residential properties outside Tokyo should yield 7-8% in gross rent. Saizen REIT's properties are unlikely to differ much from those covered by the survey.

If the book value of Saizen REIT's properties is correct at 40 cents, the gross yield on the portfolio should also be 7-8%. Allowing 20% for expenses, the net distribution should still be 5.6-6.4%. Let's call it 6%. Then the cash distribution should be 6% * 40 cents = 2.4 cents. Saizen REIT does not pay out anywhere near this amount.

Fact #1:

If the properties are correctly valued at 40 cents, then they should yield about 6% on the 40 cents, or 2.4 cents.

Fact #2:

The most recent distribution was 1.56 cents annualized.

Calculations:

If we capitalize 1.56 cents at 6%, we get 26 cents before dilution. We then have to adjust for the warrants. Each warrant contributes 9 cents of cash (exercise price) so the RNAV on a diluted basis is actually (26 * 2 + 9) / 3 = 20.3 cents.

Reality Check:

Suppose you actually went and bought a residential property in Osaka, Japan for 10m yen. The market cap rate is 7%. So you should get 700k yen a year in gross rent, right?

Now suppose it turns out your property only generates rent of 400k yen a year. Is your property in fact worth 10m yen? Obviously not. Capitalized at 7%, 400k becomes 5.7m yen. So regardless of what value you carry the property at in your books, the true market value of your property is only 5.7m yen.

Apply the same reasoning to Saizen REIT, and it should be clear that the properties are not worth anywhere near 40 cents per unit (30 cents diluted), regardless of what the valuers might say.

[Musicwhiz]

I've been reading this thread with great interest, and learning a lot from d.o.g. and others who have generously shared their opinions and perspectives.

OK, let me first qualify that I am NOT an expert at REITS and I am probably considered an amateur, so please bear with some of my personal views.

It would seem from the gist of what d.o.g. said that the NAV obtained by the valuers (i.e. 40 cents/share) is pretty far off from the "realistic" market value as computed from inference to the average yield of such properties in Japan. I think this illustrates the "gap" between what valuers say and what is actually happening on the ground.

Firstly. valuers need time to assess a situation and by the time they do so, things may have changed (e.g. further deterioration in property values may have occurred).

Second, valuers use a variety of methods to assess market value including surveying property of a similar nature and territory. They may have been off the mark in this case?

Third, I am not sure we can always rely on valuers to tell us the NAV of properties in a REIT and at the same time, rely on that for our purchase decision. As what d.o.g. illustrated, there may not be sufficient margin of safety in case the currency depreciates or the property itself depreciates.

Any views on this? Thanks!

[Nick]

Hello Everyone !

I dug some figures from the previous FY results:

Distributable Income: 1.366 billion Yen
Investment Property Valuation: 40.3 billion Yen
Unitholder's Equity: 23.9 billion Yen

Return of Equity: 5.7% (NDI/Eq)
Return of Asset: 3.4% (NDI/Inv Prop)

Would the ROA be a better measure of the Trust's asset yield as opposed to its equity ?

Cheers,
Nick

[Zelphon]

Perhaps the next report due next week will shed more light on the DPU as it is accumulated over 3 mths...

Saizen is currently burdened with YK Shintoku CMBS loan which they need to re-finance or repay in full...

Saizen is thus embarking on asset sale of YK Shintoku to reduce the overall loan amount so as to secure re-financing and if all the warrants are fully converted, Saizen may be able to raise a substantial amount of money to pay off YK Shintoku or reduce the overall loan to one that can be re-financed easily...

While the dilution factor is important, I think we need to find out the payout ratio of the rental income...

If Saizen has room to increase payout ratio to increase DPU to offset the dilution, perhaps it is worth to invest?

Saizen currently has no obligation to payout 90% of its rental income unlike most REITS in SG...

[d.o.g.]

I think we need to find out the payout ratio of the rental income...

Good point. I checked the 4Q10 statements. It turns out that a lot of the cash generated was used to pay down debt. So the 1.56 cents of annualized distribution is not a correct measure of the actual pass-through distributions.

For FY10:
Distributable Income: JPY 1,366,947
Units Issued: 953,203
Implied DPU @100% payout: JPY 1.434
JPY / SGD: 62.46
DPU (SGD): 0.0230

So we actually do get approximately the 2.4 cents that a 6% yield on 40 cents of NAV would imply.

So I was wrong - the RNAV of Saizen REIT's properties appears to be correct. My error, sorry.

On a fully diluted basis:
Units: 1,429,805
DPU (SGD) @100% payout: 0.0153

Assuming they eventually stop paying down debt and resume normal distributions, it seems that Saizen REIT can eventually pay out 1.53 cents, about a 9% yield on a fully diluted basis at the current price of 15 cents. The policy is to pay 90%, so the likely future yield is about 8%.

Does this now make Saizen REIT a good investment? Certainly, it's not as bad as I initially thought. I would still hesitate to say that there is a big margin of safety.

I actually think the more interesting detail is that Argyle Street Management (chaired by V-Nee Yeh, co-founder of Value Partners) has a deemed interest of 16% and has appointed 2 of its officers (Chan Kin and Angie Li) to the board. That alone would probably merit further study. ASM is now the biggest owner (and thus the biggest loser if Saizen REIT blows up) so they should have done a good amount of homework.

[sgd]

I still learnt a lot from this, for that must still thank you.

have a nice night dude