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Saizen REIT: 2Q FY2011 results.

Friday, February 11, 2011

A friend sent me a SMS this morning and asked why was Saizen REIT's unit price down? Well, Mr. Market is not the easiest entity to understand but Saizen REIT's announcement of a DPU of 0.52c payable on 8 March 2011 could have disappointed.

This is 0.08c lower than my estimate on 11 Nov which was for 0.6c. A lower DPU is not pleasing but it is not catastrophic. Some people recognise this as 1,000 lots each were bought up at 17c/unit in two transactions at 3.29pm and 4.50pm and the counter closed unchanged.

On 11 Nov 10, I said that "Everything else remaining constant, I estimate the distributable income for 2Q FY2011 to be JPY 220,000,000 or 7.4% higher than 1Q FY2011. Total distributable income for 1H FY2011 is, therefore, estimated to be JPY 424,943,000. Number of units in issue now at 1,111,003,000.  DPU estimated at JPY 0.38. Based on the rate of S$1 = JPY63.3, it means a DPU of 0.6c in March 2011."

Of course, everything else did not remain constant and total distributable income for 1H FY2011 is JPY383,858,000 or some 10% lower than my estimate back in November last year. Number of units in issue at 31 Dec 10 was 1,122,925,619 or almost 12,000 lots more, as warrants were exercised. As of 10 Feb 11, there were 1,125,615,406 units in issue. The S$ has also strengthened against the JPY in the last three months. These three factors contributed to a lower than expected DPU.

The lower distributable income is "due mainly to the sale of a total of 12 properties between September 2010 and November 2010. The average occupancy rate was 90.8% in 2Q FY2011, as compared to ... 90.9% in the previous quarter ended 30 September 2010 (“1Q FY2011”). Overall rental reversion of new contracts entered into in 2Q FY2011 was marginally lower by about 3.2% (... 1Q FY2011: lower by about ... 3.2% ...) from previous contracted rates. "

Back in November last year, I said the distributable income "could have been 50% higher if not for the amortising nature of Saizen REIT's loans. JPY113,397,000 was used for loan amortisation." This remains true today. While loan amortisation reduces cash available for distribution, it results in savings on interest expenses going forward. A total of  JPY215,108,000 was used for loan amortisation in 1H FY2011. Solely for illustration purposes, had the aforesaid amount been distributable, it would have amounted to an additional distribution of approximately 0.26 cents per Unit (based on 1,122,925,619 Units in issue as at 31 December 2010).

YK Shintoku’s loan issue continues to be addressed. YK Shintoku divested seven properties in 2Q FY2011, at a weighted average discount of about 4% to valuation. In aggregate, these seven properties contributed a gross revenue of JPY 6.3 million (S$0.1 million1), or 0.6% of the Group’s total revenue, in 2Q FY2011. Loan repayment using sale proceeds from these divestments as well as principal repayments made from YK Shintoku’s operations cash flow in 2Q FY2011 had reduced the loan balance of YK Shintoku to JPY 5.5 billion (S$87.0 million) as at the end of December 2010. Refinancing efforts are on-going.

See announcement here.

Related post:
Saizen REIT: 1Q FY2011 results.

16 comments:

K - said...

hi assi. im having a urgent question here, im trying to convert my warrants before the closure.. but the prob is while applying the CASHIER ORDER on dbs ibanking, i have no idea what to enter for the payee's name. have any idea? :D

AK71 said...

Hi K-,

The person to ask is JW of Wealth Buch. Here is the link:

How to exercise your warrants?

It's all there in his blog post. ;)

la papillion said...

Hi AK,

I re-entered again at 0.165. With the dividend of 0.005, I'm effectively getting back at a price of 0.160. My next batch would be at 0.155 if that happens, haha

Okay lah, at least I got myself something during the crash period, haha

AK71 said...

Hi LP,

I like your strategy. I am thinking of divesting the warrants the next time there is a run up in price.

The opportunity cost of holding the warrants is quite high since they are not entitled to income distributions.

I do have the option of exercising the warrants but I do not have a compelling reason to do so since I already have a sizeable investment in the REIT.

In the meantime, I am looking forward to getting some passive income on 8 March from this REIT. :)

la papillion said...

Hi AK,

Hmm, the warrant divestment strategy sounds good to me... Seems like a better idea than doing it on the shares ;)

AK71 said...

Hi LP,

After all, investing in the warrants is for capital gains. Well, at least that's my strategy.

Now that income distribution has resumed for the REIT, holding on to the warrants is costly compared to the units.

Of course, warrant holders could exercise them. This would resolve the issue as well. :)

Zelphon said...

Hi AK,

Do you think, with the massive warrant dilution cutting into the DPU distribution in the near future, the current price of Saizen at $0.170 is the fair value??

The recent result is disappointing for me...

I am thinking of divesting it for other counters..

The future NAV could be further diluted to $0.28 per share after taking into considerations the outstanding warrants and the divestment of the properties of YK Shintoku...

AIMS AIMPS Industrial REITS appear more attractive than Saizen now..

What do you think?

AK71 said...

Hi Zelphon,

Fair value is a rather subjective concept. What is the fair value for Saizen REIT? I would first make the following points:

Saizen REIT owns freehold residential properties in Japan. Ownership is perpetual.

Saizen REIT's loans are amortising in nature. The DPU would have been 50% higher if not for this.

Saizen REIT has one portfolio awaiting refinancing. If refinanced successfully, it would contribute to future income distributions.

If all the warrants were exercised, the NAV is closer to 32c/unit. Don't forget that warrants exercised would add to the cash position of the REIT and ameliorates the dilutive effect of have a greater number of units in issue.

Question your motivations for divesting Saizen REIT. If you are after higher yields, surely, there are S-REITs with higher distribution yields around. However, we have to compare apples with apples.

Does AIMS AMP Capital Industrial REIT own purely or mostly freehold properties? Are their loans amortising in nature? What is its current NAV/unit?

In the final analysis, these REITs are both undervalued and, therefore, make great investments for me. What would you do? That, you have to decide. :)

Anonymous said...

Any idea the XD Date for Saitzen? Can't find this info in any of the annoucements

oldm@n

AK71 said...

Hi oldm@n,

It will go XD on 17 Feb. :)

Anonymous said...

Thanks AK71 for your prompt response, where did you get the info since the official announcement in sgx website only contains book closure and distribution dates?

I'll see if I can add some Saitzen units into my portfolio before 17 Feb, if the "right" price comes along :)

oldm@n

AK71 said...

Hi oldm@n,

It is on SGX's website.

Click on the code next to Saizen REIT and you will bring up a window with all the information on the counter. The code is DZ8U.

The weakness in the last session was a good opportunity to buy in at 16.5c for anyone considering getting an exposure to the REIT. Let's see how it goes in the next 3 days. Good luck. :)

JW said...

AK,

I believe you will be very interested to load in Saizen at 0.16 and below, am I right?

If that's the case, wouldn't it be much better to convert a portion or all of your warrants since you got them a low price??? That's much easier and cheaper than waiting for the "correct" or "target" price to arrive.

Bug me on cbox if u need me to help in the mathematics.

AK71 said...

Hi JW,

Good of you to drop in. It has been a while. ;)

I decided not to hold on to the warrants anymore and sold them off. The opportunity cost is rather high and selling them locks in a rather attractive gain for me even at the current asking price.

Saizen REIT is my single largest investment and probably accounts for more than 40% of my portfolio. I think that is saying a lot. I have no intention of adding to my long position, therefore.

I am working towards making my investment in AIMS AMP Capital Industrial REIT the same size as my investment in Saizen REIT for now. :)

Anonymous said...

I wonder how much impact today's Japanese earthquake and tsunami had an impact on Saizen's portfolio and if they are sufficiently insured for this.


SnOOpy168

AK71 said...

Hi SnOOpy168,

Saizen REIT has a total of 28 properties in the affected areas. This is 19.18% of all of Saizen REIT's properties. They contribute to about 15% of Saizen REIT's total income.

I will wait for a detailed report from the management. No point losing sleep over this. :)

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