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Saizen REIT's properties: Would I buy?

Monday, October 11, 2010

Saizen REIT reported on 8 Oct that they have managed to sell another property in its YK Shintoku's portfolio.  Villa Kaigancho was sold for JPY 250,710,000 (S$3.9 million) which was at a 3.9% discount to valuation. 

The proceeds would go to repaying partially YK Shintoku's CMBS. After this repayment, the remaining balance of the YK Shintoku CMBS is estimated to be approximately JPY 6.3 billon (S$99.1 million). See announcement here.

Saizen REIT has been announcing a slew of sales in recent weeks and I mentioned that this is a good sign as it signals the return of buying interest.  

Saizen REIT owns freehold residential real estate in Japan.  

I have also mentioned before that although the real estate values in Japan have been declining, rental rates have declined at a much slower pace. Buying residential real estate in Japan now and being a landlord is a very lucrative proposition.  

So, would I buy Saizen REIT's residential real estate in Japan, assuming that I have the spare cash and if I were allowed to do so under Japanese laws?  Without a doubt, I would.

Take for instance Villa Kaigancho located in Hakodate, comprising 50 residential units, 1 commercial unit and 24 car park lots. The buyer paid JPY 250,710,000 (S$3.9 million) for an annual revenue of JPY 41.4 million (98% occupied).  That is a gross yield of 16.5% per annum!  Remember, the property is freehold! 

In Singapore, if we invested S$3.9 million in a condominium, we would be lucky to get a 6% gross yield per annum!  Sadly, I do not have that kind of money.

Related posts:
Saizen REIT: Divestment of properties.


Darryl said...

Hi AK71, I am just wondering, if Saizen Reit could have got 16.5% yield on that property, why in the world would they sell it? Are the other properties in their portfolio earning that yield or more?

Of course I understand that they wish to pay down debt but it just sounds like they are getting the bad end of the deal here.

Anonymous said...

Nice insight.

Whatever Saizen does, in assets turnover / refinancing under better terms / asset enhancements (did they?) etc, I just hoped that they can resume paying regular dividends and a high one too.

This counter remains my only exposure to the Japanese market.

Everyone huat ah.....


AK71 said...

Hi Darryl,

YK Shintoku's CMBS is in default since November 2009. Saizen REIT, as you may already know, is paying punitive 7.07% interest rate on that CMBS and would continue to do so unless they could refinance the CMBS.

To make it more palatable to potential lenders, they are selling assets in YK Shintoku to pay off the CMBS partially to make the absolute loan quantum smaller.

There would come a day (and soon) when Saizen REIT would be able to refinance a smaller loan for YK Shintoku at around 4% interest rate thereabouts. That's when a positive re-rating of the REIT would take place.

Saizen REIT's other properties in Japan also enjoy very high yields. This is another reason why I am so optimistic about this REIT. Saizen REIT is a hidden gem that more would discover in time. :)

AK71 said...

Hi SnOOpy88,

I have no doubt that the next income distribution which would take place in March 2011 would be a much bigger sum. ;)

Anonymous said...

Hi Darryl,

When a company is in default, its primary responsibility is to its creditors and not to its shareholders. Finding ways to repay the defaulted debt should take priority over any attempts to make a profit. Similarly here, Saizen's TK 'subsidiary' is in material default and hence it has to start selling assets to reduce its exposure to the CMBS if the creditors will it so. It can't say no since its primary responsibility is to satisfy its debts owed to its creditors.

I don't expect a full divestment...banks are more likely to be willing to refinance the loans but not at the current loan amount.

Not vested :)


AK71 said...

Hi Nick,

Actually, the proposal to do a
"progressive and partial sale of YK Shintoku’s properties to reduce the absolute amount of the
YK Shintoku Loan" was made by the loan servicer and accepted by the CMBS holders (the existing lenders). This point is purely academic but I just want to highlight it.

Saizen REIT also has two other portfolios which are fully unencumbered. It could leverage on these portfolios together with YK Shintoku's remaining properties to make refinancing more palatable to potential lenders. This could lead to an earlier refinancing of YK Shintoku's loan. Stay tuned. ;)

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