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Saizen REIT: March 2010 Presentation

Sunday, March 14, 2010

Regular readers would know by now that I am accumulating units in Saizen REIT as it is a huge bargain.  I have likened it to buying a $2.9m condominium unit for $1.6m before.  That analogy still stands.  On 3 March 2010, Saizen REIT's manager, Japan Residential Assets Manager Limited, presented their latest results and I would like to share some numbers here with fellow unitholders and other interested parties.

The NAV per Unit is S$0.40.  However, some are worried that the portfolio of properties under YK Shintoku might be foreclosed.  In case of foreclusure, the NAV per Unit excluding YK Shintoku would be S$0.36.  On top of this, some are worried about the dilution that would take place once all the warrants are exercised.  In such an instance, the diluted NAV per Unit would be S$0.28.  The diluted NAV per Unit is based on 1,446,357,417 Units and warrant proceeds of S$44.7 million.  Please find the full details at:
Saizen REIT: March 2010 Presentation

Saizen REIT is on track to resuming income distribution to unitholders in mid 2010 and its gearing level would fall upon the the full repayment of its CMBS loan for YK Keizan in April next month. A re-rating upwards by credit agencies is highly probable.

Although Saizen REIT's remaining CMBS loan for YK Shintoku is still being negotiated, personally, I do not foresee foreclosure taking place. If the loan is still being serviced, why would the lender want to proceed with foreclosure, especially with the punitive (aka lucrative) interest rate of 7% imposed on the borrower, more than doubling from the 3% before? Having said this, it would be in the interest of all unitholders that Saizen REIT's manager secures re-financing at a more reasonable cost soon.

June 2009 data from CB Richard Ellis, Colliers International, show that the average rental yield in Japan is the highest for residential properties at 5.5 to 6.5% p.a. This is followed by industrial properties, retail properties and office properties. Such high yields have attracted the attention of institutional funds which are expected to snap up assets at bargain basement prices. It is when things look the bleakest that the most opportunities are to be found. According to one Japanese investment bank analyst, for example, “we’ve been approached recently by many pension funds that want to increase their exposure to real estate because they realize prices are going down. They are happy to buy early because their return target is very low, maybe 5 percent.”

Some people have asked me why not go buy some Japanese residential real estate? Well, obviously, I do not have deep pockets like the institutional funds. I won't be able to buy a single apartment in Japan, let alone a whole apartment block.
The way I see it, Saizen REIT's financial health has improved significantly and will continue to improve. With its units trading at such a deep discount to NAV, if I have the money, why bother buying the underlying assets? I would just buy the REIT. To make it more tantalising, Saizen REIT is likely to yield upwards of 10% p.a. when it resumes income distribution to unitholders from mid 2010.  This is much higher than the average of 5.5 to 6.5% yield for Japanese residential real estate as reported by CB Richard Ellis, Colliers International in their findings published in June 2009.

Some people I spoke to responded by saying they have missed the boat and lamented that they should have bought some units when it was 10c.  I would tell them that I started buying at 13c, not 10c, and I am still buying today.  Why? The fundamentals are still very compelling and the charts look good.

Related posts:
Passive income with high yields: Saizen REIT.
Buy Japanese real estate.
Saizen REIT: Long-term buy.
Saizen REIT: A symmetrical triangle?


Anonymous said...

for all u know, funds are reading this. keep our fingers crossed.

cheers dp

AK71 said...

Hi DP,

Thank you for thinking so highly of my blog. :) One of my little daydreams is having institutional investors reading my blog. ;)

Have a good Sunday.

RK said...

Hi AK,

Thanks for the info. Can I ask how you estimate the yield for Saizen?


AK71 said...

Hi RK,

There are so many things I want to say because there are so many estimates out there by different parties. Many are also applying discounts to their estimates and these can be quite subjective but I shall try to keep it simple.

To estimate the distributable income, I look at the Income Statement. Nett income from operations in 2QFY2010 was JPY364,000m for the group. There was a reduction in nett income from operations in 2QFY2010 compared to 1QFY2010 due to the divestment of 5 properties by the manager.

As Saizen REIT has defaulted on YK Shintoku's CMBS loan, I doubt it would be divesting anymore properties while seeking refinancing options. So, if you multiply 2QFY2010 nett income from operations by 4, we could estimate the full year total to be JPY 1,456,000m. Assuming Saizen REIT pays out 90% of its income, we arrive at JPY 1,310,400m. Please bear in mind that this is an estimate.

At the end of February 2010, Saizen REIT had 952,799,055 units and 493,558,362 warrants in issue. Many are actually buying the warrants for capital appreciation with no intention of converting them into regular units in the meantime. So, if we do a simple division of the distributable income by the number of units in issue, we get JPY 1.38 per unit. Based on the prevailing exchange rate, we get Singapore 2c per unit. 1 JPY = 0.01516 SGD (provided by UOB). This translates into a yield of 12% based on the last done price of 16.5c.

Of course, I expect the warrants to be fully exercised by 2012 which, incidentally, would provide Saizen REIT with more funds to bring down its gearing level or to fund yield accretive purchases then.

Assuming that all warrants are fully exercised and nett operation income stays the same, estimated distributable income would reduce proportionally to 1.4c per unit. This translates into a yield of 8.5% on the last done price of 16.5c.

Sounds good, doesn't it? :)

RK said...

Hi AK,

Thanks for the detailed analysis again, appreciate it. Anywhere between 10% - 12% yield at resumption of income distribution would indeed be very attractive, especially if the gearing also drops significantly. I may exercise my warrants instead of selling them for capital gain. :)

AK71 said...

Hi RK,

No problem. :) You probably know this but just a quick reminder that we are looking at yield. So, exercising the warrants, you have to hold the units for a whole year as you will not get 10% to 12% at one go but over four payments spread over 12 months.

Having to fork out more money and, on top of that, hold for 12 months is not very attractive for investors who are after capital gains since 10% to 12% yield would be considered modest. However, for investors who are after regular passive income, this should be attractive.

One more point, if all the warrantholders think like you, the yield would be a much lower 8.5% p.a. ;)

Anonymous said...


Would you consider purchasing the YK Shintoku CMBS, since you have established that the underlying real estate portfolio generates more than enough cashflows to sustain its punitive 7% interest? With this CMBS in maturity default I will not be surprised if these bonds trade at a discount, making its effective yield even higher than 7%

I am actually quite interested in finding out the current bid-ask price for the YK Shintoku CMBS security, any idea how I can do that?

As always, grateful if you can share your views


AK71 said...

Hi AT,

I don't know how to buy a CMBS. You might want to call Saizen REIT's manager and see if they know. :)

I also do not have a strong interest to be a lender. If I had the money, I would consider taking over Saizen REIT. It would be a steal compared to buying the underlying assets one by one as that would cost more. Buying the REIT would give me ownership of 161 apartment buildings in Japan at almost 60% discount to their current market values! Unfortunately, I don't have that kind of money. :(

YK Shintoku's CMBS totals JPY 7,253.2m. That portfolio of properties is worth JPY 9,078.7m. That's a 20% difference. 7% interest is JPY 507.72m annually. YK Shintoku, with the divestment of 5 properties, would still generate a gross rental revenue of JPY 920.5m annually. Even after taking away 15% for expenses and fees, it would still have JPY 782.38m left. After deducting JPY 507.72m in interest expense (at the current 7%), YK Shintoku would still generate a nett income of JPY 274.66m! Very healthy. Personally, I do not see any reason why the CMBS loan could not be re-financed from this standpoint.

AK71 said...

Paging for RK,

I just read through my first reply to you in this post. I made a few mistakes by putting in "," when I should have put "." in the numbers in paragraphs 2 and 3. Maybe you noticed them but I am going to point them out here for the benefit of other readers:

"To estimate the distributable income, I look at the Income Statement. Nett income from operations in 2QFY2010 was JPY 364.000 m for the group. There was a reduction in nett income from operations in 2QFY2010 compared to 1QFY2010 due to the divestment of 5 properties by the manager.

"As Saizen REIT has defaulted on YK Shintoku's CMBS loan, I doubt it would be divesting anymore properties while seeking refinancing options. So, if you multiply 2QFY2010 nett income from operations by 4, we could estimate the full year total to be JPY 1,456.000 m. Assuming Saizen REIT pays out 90% of its income, we arrive at JPY 1,310.400 m. Please bear in mind that this is an estimate."

la papillion said...


Second shot out ;)

AK71 said...

Hi LP,

Let me see if I understand your comment correctly. You bought more Saizen REIT units today? That 100 lots bought up at 16.5c at 11am yours? ;)

Anonymous said...

hi ak,
we have a new player for saizen today. Merril Lynch stepped in to buy at 16.5 cts but we still have credit lyonnais selling both mother and warrant. To date, we have UBS, Credit Sussie and Merril Lynch on the long side. I noted that theres abit of buying from UOB as well.
cheers DP

AK71 said...

Hi DP,

Thanks for sharing this. I bought more Saizen REIT today at 16.5c too. ;)

la papillion said...

Hi Ak,

No lah, not such a big player :)

Hi DP,

Just a do you know ML, CS, UBS are buying?

Createwealth8888 said...

For every transaction, there is a buyer matching a seller/sellers or a seller matching a buy/buyers. Both can be right, one is right and the other is wrong, or both are wrong.

RK said...

Thanks AK, for highlighting the correction in the earlier post. Wish I could have more funds to invest in Saizen, but they are parked in other counters. Always not enough money for investment.. heh heh

Anonymous said...

hi LP,
i have markers placed at various levels for both mother share and warrants. so when they get hit, i know the counter party.

cheers dp

AK71 said...

Hi CW,

Thanks for sharing.

Hi RK,

Always an issue for most of us. Money not enough. ;p

Hi DP,

Thanks for letting us in on your methods. :)

Anonymous said...

Good Morning AK71
Your blog is very interesting. Now I am viewing it everyday. I am into reits too, mostly those with high yields, like Cambridge, Aims, LMIR, Suntec. I am retired and these yields are my passive income. Thanks to you, I am into buying Saizen too.
Questions. You spend a lot of your time in this blog. Are you a full time trader?

AK71 said...

Hi CS,

REITs are income instruments and perfect passive income generators. Of course, the idea is to look for good REITs. I hope Saizen REIT will be a valuable addition to your portfolio. I would average in and not buy all at one go. That's what I am doing.

I have a full time job and usually only update my blog in the evenings and on weekends. While at work, I check my blog for comments and try to reply in a timely manner.

It would be nice to be a full time trader or investor. All in good time, I suppose.

Thank you for the compliments and for visiting daily. Please continue to visit and I wish you the best in securing a stronger stream of passive income in the meantime. :)

Anonymous said...


Between Saizen and FIRST Reit, which counter would you be more inclined to, given the case that you would choose only ONE reit to invest on and to help you generate long term passive income. Becos i am caught in this dilemma now and perhaps you can share your view here. Thank you.

AK71 said...

Hi Anonymous,

First REIT has a yield of >8%, a gearing of 15% and a discount to NAV of about 10%. At this point, I would buy this for the yield and low gearing, not value.

Saizen REIT will not distribute income until middle of 2010 and this is estimated to be 8.5% p.a. in the event that all the warrants are excercised and a 90% payout. Gearing level would still be higher than First REIT's (in the event that YK Shintoku's portfolio is not foreclosed). It is Saizen REIT's huge discount to valuation that makes it a compelling buy. So, you would buy Saizen REIT more for value at this point in time.

I know I am not giving you a direct answer but I hope the information here is helpful. :)

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