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Saizen REIT: Divestment of Kamei Five.

Thursday, October 28, 2010

Saizen REIT's YK Shintoku portfolio divested a smallish property, Kamei Five, today for JPY 70,401,250 (S$1.1 million). This piece of real estate is located in Hiroshima, was built in July 1989 and comprises 22 residential units, 2 commercial units and 2 car park lots.

A quick check in the annual report shows that Kamei Five was 92% occupied as of 30 June 2010 and took in JPY 9.9 million in annual rental income. That represents a gross income yield of 14%! What would I not do to buy a building from YK Shintoku's portfolio.

"Following loan repayment using sale proceeds from the divestment of Kamei Five, the remaining balance of the loan of YK Shintoku is estimated to be approximately JPY 5.9 billion (S$94.6 million). Taking into account applicable cash reserves of JPY 0.6 billion (S$9.6 million) maintained by YK Shintoku under the loan agreement, the net outstanding loan of YK Shintoku amounts to approximately JPY 5.3 billion (S$84.9 million)." Read announcement here.

On another matter, Saizen REIT’s quarterly financial results for the period ended 30 September 2010 will be released before market opens on Wednesday, 10 November 2010.

Related post:
Saizen REIT: AGM on 19 Oct 10.
Saizen REIT's properties: Would I buy?

12 comments:

Anonymous said...

Should have proposed during the AGM to divest the property to existing shareholder who has the funding to purchase. Win-win for both parties....

john.

AK71 said...

Hi John,

I see that you are tempted too. ;p

I am sure if you contact the management, they would fix an appointment for you. ;)

Anonymous said...

" comprises 22 residential units, 2 commercial units and 2 car park lots."

S$1.1 million for so much items ? And freehold somemore !

No wonder Saizen is focused on Japanese properties. I seriously think that this may barely or not even get a decent 100sqm of any newly launched residental projects in SGP leh. Too bad, non citizen cannot touch the properties there directly.

...if I had the funds.... Hope rises a few times a week.

Seriously, it may be wise to do a rights to raise some cash but some may not liked it. But then better clear of this torn in the eye CBML issue and return with a good name. Live to earn for us, more DPU, another day.

Huat ah

SnOOpy168

Anonymous said...

Erm i just wonder why not Saizen Reit just buy back the property from Shintoku( the high yield ones) and put it into another SPV like shintoku 2 without the loan since yield is high? This would be an good buy and since it will be from left hand to right hand...unless there are better buy out there, the move would be accreditive.

but on the other hand, its an old property and maintenance would prop eat a huge chuck of the yield; thus net yield could be lower.

let me know of your input AK.

KY

AK71 said...

Hi SnOOpy168,

It is a good deal. :)

Japanese real estate is at its lowest in 20 years. Residential real estate demand is less elastic than most.

I don't think unitholders would like another rights issue and I don't think it is necessary. Without YK Shintoku, Saizen REIT still represents very good value at current price level.

I would give the management a few more months. :)

AK71 said...

Hi KY,

I am sure there would be a conflict of interests. Remember whenever the REIT buys or sells a property, the management gets paid a fee.

If they are allowed to do what you suggest, they could be buying and selling properties internally and making 0.3% with each transaction regardless of the circumstances.

If Saizen REIT has enough funds to "buy" some of YK Shintoku's properties (which they have), it makes more sense for them to work towards getting the CMBS refinanced ASAP using the cash in hand to reduce the absolute loan quantum necessary (which would increase the success rate of securing a loan). This, I believe, is what the management is trying to do. :)

Anonymous said...

Hi AK,

Thanks for the prompt reply. I'm just thinking of restructuring the Shintoku with respect of the free cash flow they are gonna pay as dividend towards rescuing( injecting cash into Shintoku) via debt reduction by buying over the properties with high yield and exempt themselves from the 0.3% fees in this one off exercise by buying over the high yield properties with unemcumbered cashflow from other SPV into a new SPV, we could see

1.an increase in NPV
2. lower absolute debt in Shintoku via internal loan amortisation. I appreciate the need to return cash to shareholder but they did say to look into other potential purchase near Tokyo area. I do not see a conflict if they can source internally the good high yield properties from the defaulted Shintoku unless they can look for a better deal which imho not really possible.

I think the outcome will be good i.e like Rickmers' case.


my 2cts worth.
Cheers

KY

AK71 said...

Hi KY,

I like your idea. :)

However, I do not think the management would waive the 0.3% divestment fee as that is one way they make money even if your idea was viable. Of course, they would have to levy a fee for purchase of the same properties which they divested as well (borrowing your phrase "left hand to right hand"). Therein lies a conflict of interest.

How would they make an offer to themselves? At a discount to valuation? Would this be acceptable to the CMBS holders? I think not. The CMBS holders would think that they are being taken for a ride. Transactions have to be at arm's length to be persuasive.

The essence of your idea would only work if the debt of YK Shintoku could be restructured. Unfortunately, a CMBS has multiple bond holders and it is almost impossible to have all of them agree on a common restructuring plan. Hence, the current situation.

Anonymous said...

Hello,

If Saizen REIT could afford to purchase the properties from its own Shintoku TK, it would imply that it has sufficient cash to repay the debt (which it doesn't). So this option is not very viable. If they sell too cheaply to itself, CMBS holders will not be pleased.

It must also be noted that Saizen paid a lot more for the same assets hence its yield (or return on investment) isn't in the double digit figures. This would only apply for the current buyers. So Saizen might very well be getting rid of the hardest-hit properties first in terms of depreciating valuation. High yield implies high risk as well. If I need to raise cash, I will only sell my best stuff last.

FY 08 - Saizen devalued its assets by 5.9 billion yen

FY 09 - Saizen devalued its assets by 6.4 billion yen

FY 10 - Saizen devalued its assets by 1.7 billion yen.

This is a whooping 13 billion yen !

At the moment, it seems to be a pretty good time to purchase Japanese properties judging by the rather high yields. Unfortunately Saizen is in the wrong side of the equation. But I guess it is a necessary evil to clear the last 'infection' before it can heal properly.

Cheers
Nick

(Not vested. Not a call to buy or sell. Do your own research. Pls double check the data.)

AK71 said...

Hi Nick,

I think KY was suggesting that Saizen REIT buys some of the properties from the YK Shintoku portfolio, not all. ;)

Financially speaking, Saizen REIT has the money to buy some of the properties from the YK Shintoku portfolio but it is probably not practicable for the reasons listed in my earlier comments.

Yes, this is a great time to be buying real estate in Japan. That's exactly what GIC and Temasek's Mapletree have been doing. I wonder if some sovereign wealth fund would be interested in becoming a substantial unitholder of Saizen REIT. ;)

Anonymous said...

I agreed that the Reit had been devalued numerous times and the share price does reflect that. i.e. saizen not trading at $1 nor are other battered shares and Reits. however, thats beside the point. if they can sell the properties to others at such low price, we the shareholders are at the losing end. Whats the point of a trust if it cannot even protect the beneficiaries?

on the other hand, the old foxes at Saizen had been quite wily in the preeptive measure with the right issue liao. which is why AK is still vested in them. One point i am unsure though, the involvement of the Transpac people recently. these people comes in and i see an aggressive deleverage of shintoku... does smell a rat as I've not been on the other side to chk who bought those properties from Saizen.(it just said someone comes in and buy full cash or short settlement time.) well, hopefully the transpac people does have saizen's benefits in mind and not being there to just sit ard taking director fees.

Whats your take AK, i'm sure you know the new ID are from VC industries...also listed on our bourse...BIG T, they had just divested some of their holdings and maybe are going to buy into Saizen. that would bode well for existing shareholders. well, enough grumbling...liao

Waiting to see your input AK.
Cheers

KY

AK71 said...

Hi KY,

I saw the two new non-executive directors at the AGM. They represent a substantial shareholder, Argyle Street Management.

Mr. Kin Chan is also a director of:
1) Overseas Union Enterprise Limited
(March 2010 – present)
2) Transpac Industrial Holdings Limited (October 2004
– present)
3) BTS Group Holdings Public Company Limited (July
2010 – present)

Ms. Angie Li is also a director of:
Transpac Industrial Holdings Limited (August 2006 –
present)

I took a look at Transpac Industrial Holdings Limited's latest report for the second quarter ended 30 June 2010, it does look as if they have plenty of cash and cash equivalents on hand. Very little liabilities.

One can only hope that the new non-executive directors would make positive contributions to the REIT.

You have made a very interesting connection that I have not noticed before. Thank you. :)

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