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Saizen REIT: 3Q FY2010 Results.

Wednesday, May 12, 2010

A good set of numbers overall for Saizen REIT.  The only thorn in its side remains the CMBS for YK Shintoku which it defaulted on late last year.

Key points for me:

1. Saizen REIT's properties are all Freehold and not Leasehold.  So, there is no "depreciation" which some investors might be concerned about.

2. Occupancy rates have been consistently above 90% even through the financial crisis which reinforces the idea that demand is relatively inelastic for Saizen REIT's properties.

3. Average rental rates have stayed consistently above JPY1,500 psm.

4. If YK Shintoku were to suffer foreclosure, the nett effects would be a 22% decrease in nett property income, a 10% reduction in NAV and its gearing level would decline from the current 36.9% to 27.4%. 

A 22% decrease in nett property income would probably mean a similar reduction in dpu from my projection here. Based on the current number of units in issue, the dpu would reduce from 2c to 1.56c giving us a yield of 9.45%.  The NAV would reduce from 39c to 35c approximately.  With the proforma foreclosure gearing at 27.4%, Saizen REIT would emerge unscathed and, in my opinion, stronger in its balance sheets. So, if YK Shintoku goes through a foreclosure, Saizen REIT remains a great investment as it has high yield, a big discount to NAV and low gearing.

The CMBS lenders for YK Shintoku, as expected, are dragging their feet and still "formulating course of action".  Why would they want to go ahead with foreclosure when they are receiving 7.07% interest payment now? They are lenders, not property managers or investors, after all.

YK Shintoku's property income is more than sufficient to cover the punitive interest payment due to the default.  So, it is still more positive than negative to keep the status quo.

Presentation slides here.



SAIZEN REIT:
Out of woods and resuming cash distribution
Written by Sim Kih, Thursday, 13 May 2010.
Read the article in NEXT INSIGHT here.

Related post:
Saizen REIT: March 2010 presentation.

14 comments:

Anonymous said...

Hi AK74,

I am personally vested in Saizen REIT, but i feel that you are very optimistic over its dividends. I feel that what is glaring at the presentation isn't so much on the CMBS loan, but the 5.9bil yen bank loan that is due next year.
If rental and occupancy rate has been stable and yet they have defaulted on the YK Shintoku loan, where can they find cash for repayment (while issuing dividends), given that their cash hoard is considerably low now.

-Kelvin

AK71 said...

Hi Kelvin,

If we expect Saizen REIT to repay the conventional bank loans which are due next year using income generated from its properties, there is no reason to think that we will get any income distribution at all. With conventional bank loans, chances are the loans will be renewed. Specifically, it is the CMBS market which has soured. Credit has actually become increasingly available. We must also take into consideration the much lower gearing level that Saizen REIT has now which makes it easier for it to secure loans.

That Saizen REIT's rental and occupancy rates have been very stable is evident in the numbers. Indisputable.

The default on YK Shintoku was inevitable as income generated from the REIT's properties, in addition to funds raised from the rights issue was insufficient to repay all CMBS. Saizen REIT basically overleveraged back then.

As long as there is every intention to renew those bank loans due next year and as long as credit conditions continue to improve, there is no reason to doubt Saizen REIT's ability or will to distribute income in the quantum I am expecting. :)

Anonymous said...

Hi Ak71, im still 20 now and haven yet got an trading account and enuff capital, however i am not the TA type person and hence i find reading ur posts on saizen reit more easy for me.

am taking closer look on this stock, and comparing it with other reit stock on sgx as well.

anyways this is just a comment to thank your writings on this blog. nth much on the topic itself. :D

J -

AK71 said...

Hi J,

It is good to start reading up first and not jump into the deep end of the pool right away. In a way, it is good that you are 20 and not trading yet. I started in my mid 20s and made so many mistakes and learned the hard way. :(

I am really just blogging about my own learning process, if you think about it, and if it has helped you in your learning process in any way, I am happy. :)

Anonymous said...

Hi AK,

If reits like you mention, just renew its bank loans, what would happen when its lease is due to expire, won't the reits have to cough out more money to renew the lease, meaning it would have a larger loan on the same piece of porperty with the same income.

Thanks
KL

AK71 said...

Hi KL,

I suppose you are referring to the leases on a REIT's properties? Another reader was concerned about this too. Solution? Invest in Saizen REIT where all their properties are freehold! ;)

Jokes aside, yes, when the leases on leasehold properties end, I can imagine certain REITs going with cap in hand to ask for money from unitholders to extend the leases!

We are invested in REITs for the regular income distributions and some of this income should be set aside in instances where there might be a need for re-investment.

It is just the same as if we were to invest in a piece of real estate in Singapore. If we invest in a 30 year leasehold warehouse building, we have to think of the day when we have to fork out more money to renew the lease. However, if we buy a freehold property, there is no such need. :)

Raelynn said...

Dear J, not sure if you'll see this, but to my understanding, now that the singaporean law has changed to allow individuals of 18years of age sign contracts, you may start a trading account now that you are 20. the capital part i understand might be a bigger challenge but that's another story for another day =)

Anonymous said...

hi Raelynn,

thanks for informing me. im sure Poems allow 18 and above to sign up a acct with them.
but i've also read somewhere that the law only allow us to have the CDP account to hold shares, and not actually being able to buy/sell shares on our own using our own account.

Need more sources/confirmation from you if you dun mind :D

J -

Anonymous said...

OPPS. hi AK71, i didnt notice that the comment must go thru approval, i just keep spamming post while wondering why doesnt it appear........ im truly sorry.

J-

Anonymous said...

http://afralug.com/wsforum/showthread.php?tid=3585

AK71 said...

Hi J,

It's OK. I was wondering why my blog is suddenly so popular with 9 comments waiting for moderation. Then, I realised a few of them were the same. ;p

Actually, even if the law allows you to start trading at 18, I think you should take it slow. No hurry. :)

Anonymous said...

Hi
Just inform u that u can open a young investor a/c with Phillips Securities and a CDP a/c, just did it for my girl...however u need to deposit cash first with poems before they allow u to trade

Raelynn said...

I agree with the anon above, to my understanding a phillips account and a cdp account is different. Phillips account is the one that allows you to trade (I didn't know that there must be cash in a/c. Mine didn't from the start. I only pay phillips if my buy order goes thru and transfer the money via Internet banking). A cdp account is the one that holds your portfolio as you mentioned. For example if you wish to transfer shares to someone or someone wishes to transfer shares to you, they will go to cdp to do the procedure not Phillips :) hence the conclusion is that you will need two accounts, cdp and a trading. But I think when you do your trading ac, if you mention that you have no cdp, they can give you the form for cdp ac to fill out so that u don't have to run two places.

Raelynn said...

Dear J,

aside from the post above, i've taken a look at the phillips securities website and i notice that they have various initiatives and accounts. the one that the anon mentioned having to have a prepaid account might refer to the young investors group initiative. for more info, it might be best to email the customer service to enquire if it is necessary to join the initiative if u are yet to attain 21 or you can still open a normal trading account with no prepaid amount in the account.

I do agree with AK, take your time, dont feel rushed into jumping into the stock market. it's a jungle out there.

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