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Saizen REIT: Emphasis of matter.

Thursday, September 23, 2010

Emphasis of Matter
 
Without qualifying our opinion, we draw attention to Note 1 of the financial statements. As at 30 June 2010, the Group has interest-bearing borrowings of JPY7.8 billion, which are due for repayment within the next 12 months from the balance sheet date, of which the Group expects
to repay JPY0.7 billion with cash generated from operating activities. The Group is currently in negotiations with financial institutions to refinance JPY7.1 billion of these borrowings, which are held by a subsidiary Yugen Kaisha Shintoku (“YK Shintoku”) and have been in default since November 2009. The Group has also implemented a plan to divest some properties of YK Shintoku to reduce the borrowing amount with approval from the lender.
 
In accordance with the loan agreement of YK Shintoku, the lender has the right to take control of YK Shintoku in the event of default. As at 30 June 2010, the net asset value of YK Shintoku amounts to JPY2.0 billion, which approximates 8.6% of the net assets of the Group.
 
The subsidiary’s ability to continue as a going concern is dependent on the successful outcome of these refinancing negotiations with financial institutions and support from the lender by not seeking foreclosure of the assets of the subsidiary within 12 months from the balance sheet date. These conditions indicate the existence of a material uncertainty, which may cast significant doubt on the subsidiary’s ability to continue as a going concern. If the subsidiary is unable to continue in operational existence for the foreseeable future, adjustments would have to be made to reflect the situation that its assets may need to be realised other than in the normal course of business and at amounts which could differ significantly from the amounts stated in the balance sheet. In addition, the subsidiary may have to provide for further liabilities which may arise. The Group’s financial statements do not include the adjustments that would result if the subsidiary was unable to continue as a going concern.

PricewaterhouseCoopers LLP
Public Accountants and Certified Public Accountants
Singapore, 22 September 2010

Saizen REIT's manager has reiterated that the loan of Yugen Kaisha Shintoku (“YK Shintoku”) is non-recourse loan and is not cross-collateralised, and there is also no cross-default in respect of the loans of the other subsidiaries of Saizen REIT. Given its non-recourse nature, the decrease in the net asset value of Saizen REIT and its subsidiaries (the “Group”), in the worst case scenario of a foreclosure of YK Shintoku, will be limited to the net asset value of YK Shintoku (which amounted to JPY 2.0 billion, or 8.6% of the Group’s net assets, as at 30 June 2010).

In some of my earlier blog posts, I looked at what would happen if YK Shintoku should suffer foreclosure.  

In one blog post, I mentioned: "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%.  

"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."

Related posts:
Saizen REIT: 3Q FY2010 Results.
Saizen REIT: Better than expected DPU.

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