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Saizen REIT: Divestment of properties.

Wednesday, September 29, 2010

Saizen REIT has managed to divest another four properties in its YK Shintoku portfolio.  A friend asked me if this is a good thing and my answer was an unequivocal "yes".  Why?

1. The plan to divest some properties of YK Shintoku to reduce the borrowing amount is with approval from the CMBS lenders. This shows that the lenders have no wish to foreclose YK Shintoku and would rather have their money back. In the meantime, they enjoy a rich 7.07% interest payment on the loan amount.

2. Saizen REIT's management is currently in negotiations with financial institutions to refinance YK Shintoku's loan and by divesting some properties, its absolute loan quantum is smaller and this makes it more palatable to potential lenders.  Like I mentioned before, a successful re-financing of YK Shintoku's loan would most likely result in a much lower interest rate which would lead to a positive re-rating of the REIT.

3. The properties divested are at smallish discounts to their most recent valuations.  The discounts are at 0.2%, 3.7%, 5.3% and 6.1% for the four different properties. This demonstrates the return of buying interest in the Japanese real estate sector as investors seek out better returns for their money.  This bodes well for Saizen REIT as the apartment buildings that they own are below replacement value.  This means that investors are unlikely to build new and would rather seek to buy in the resale market.

Following the loan repayment using sale proceeds from the divestments, the remaining balance of YK Shintoku's loan is estimated to be approximately JPY 6.6 billon (S$103.6 million). The loan was JPY 7.1billion (S$111.5 million) before.

See announcement here.

Related post:
Saizen REIT: Emphasis of matter.


Anonymous said...

successful refinancing of YK Shintoku loan is perhaps the most important thing that mgmt should focus and execute now. I believe it would "bump" up yield quite significantly for all.


AK71 said...

Hi CM,

Yup, that is exactly what they are concentrating on now, refinancing YK Shintoku's CMBS. They said this after they successfully refinanced the loan from Soc Gen for GK Choan earlier this year.

Successfully refinancing YK Shintoku's CMBS would lower the interest from 7.07% to about 4%. This alone would free up JPY200m a year!

I am hopeful that this would happen within the next 3 to 6 months. :)

Anonymous said...

Hi AK, mgmt has been talking about this refinancing for awhile now...but still no conclusion. this savings of 200 million would be equivalent to about S$0.0031 (don' really know how much warrants were converted recently), more than the dividend they had just paid.

Perhaps that is the reason for a Co-CEO......


AK71 said...

Hi CM,

Yes, JPY200m, at today's exchange rate (JPY1000=S$15.48) would be about S$3.1m.

As per announcement of 7 Sep, a total of 100,125,575 warrants were exercised. At 9c each, Saizen REIT would have received slightly more than S$9m. Nice. :)

As of 7 Sep, there were 1,053,328,630 units in issue and 393,028,787 warrants outstanding.

So, JPY200m would translate to about 0.3c more DPU per year. Based on the current unit price of 15.5c, that's an additional 1.94% returns per annum. Quite substantial.

Let's see if YK Shintoku's CMBS gets refinanced sooner than later. :)

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