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Saizen REIT: Staying calm and rational.

Monday, March 14, 2011

Many would like to know what am I doing next with regards to Saizen REIT. I have replied to readers in this blog and in emails that I am holding my position and waiting for more announcements from the managers.

I would stay calm and think through the situation rationally, knowing the current financial strength of the REIT as well as the possible maximum loss of NAV and income it could suffer if all possibly affected buildings were destroyed. I hope I have done a good job so far. Indeed, I have been sharing my findings and thoughts here in my blog.

It has now been confirmed that, of the 14 buildings visited, all are still standing and have only suffered minor damages. There are also no casualties amongst the tenants. So, the loss of NAV and income which could be suffered is much reduced now. Consequently, any probable negative impact on income distribution to unitholders is reduced. There are 14 more buildings to be visited in Sendai and we will have to await the next report from the REIT's managers.

Technically, price action today formed a white hammer after a gap down to 13.5c with an intra-day low of 13c, a price last seen on 9 Nov 2009.

In my blog post this morning, I mentioned that the selling is overdone and that panic was in the air. I stand firm by my statement. In the following days, we could see the gap covered and we could see the former support at 15c providing resistance. Now, for anyone looking to reduce exposure, that would be a fairly good time to do so.

Do I think that major investors are abandoning the REIT? I do not think so. Saizen REIT has more than a billion units in issue. The total trading volume for today, although higher than usual, is only under 14 million units.

A total of 7,954 lots were bought up today with 4,010 lots bought up at 14c alone. This compared to a total of 5,723 lots sold down today. Total buying up numbers trumped selling down numbers. It is my guess that many investors recognise that the REIT is very undervalued and could be using this opportunity to accumulate at even lower prices. If the unit price were to weaken further, I would buy more.


Anonymous said...

HI AK71,

can you comment on the possibility of the Nuclear fallout having a negative impact on Saizen reit property.

IF it happens that the properties are closeby the nuclear plants and there is call for evacuations, definately - rentals would go to NIL while the loans are outstanding, and on top of it should the property valuation drop below a certain amount, the banks might call the trust to pay the difference.

Paul said...

You may not continue to remain calm after reading this.

Someone from valuebuddies posted a reply from Saizen as follows:

"Thank you for your email enquiry and your concern for us.

As you may imagine, we are swamped with enquiries from different parties, including investors. So please accept our apologies for the delay in replying.

Regarding your first question, as disclosed in our IPO prospectus, Saizen does not generally maintain earthquake insurance on its properties. We believe this is consistent with industry practice in Japan for residential rental buildings. In general, these types of risks (such as war risk, risks of acts of terrorism, risk of nuclear contamination and risks of earthquakes) may be uninsurable or the cost of insurance may be prohibitively high when compared to the risk.

We will know very soon the full extent of the damages to our buildings (as we make further announcements). Our properties are in city center of Sendai where damages are relatively minor as compared with what you might have seen on TV, which are mainly tsunami-related in districts closer to the coast.

Regarding your second question, we have no immediate plans to raise new funds because of the earthquake.

Please let us know if you have further questions."


AK71 said...

Hi Anonymous,

I have thought of this scenario before and actually have a blog post on the subject:

Saizen REIT: Sendai, Koriyama and Moriokas' positions in relation to the two distressed nuclear power plants.

I have also separately mentioned that if all the buildings in the affected area were to be damaged beyond recovery, loss to DPU and income distribution should be capped at 15%.

As for the loan to valuation, currently, the only portfolio in Saizen REIT which has an 80% loan to valuation level is YK Shintoku which has its CMBS in default. The other portfolios have more conservative loan to valuation levels and are conventional amortising bank loans.

Could you include your name or initials in future comments? Thanks. :)

AK71 said...

Hi Paul,

Then, it might surprise you that I am still calm as this is a scenario I have imagined as well.

In fact, I have blogged about the worst case scenario which is a complete loss of all the 28 properties in the affected areas. This would lead to a 15% loss of NAV and income distribution for the REIT.

The fact that all the visited properties have so far been checked to only have minor damages and that there is no casualty amongst the tenants is a big relief.

Saizen REIT currently has a big cash hoard and it is natural that they do not need to raise funds from unitholders for any repair works on affected buildings since the damages are minor so far.

Thanks for sharing the information. I appreciate it. :)

raelynn said...

the containment vessel has breached. frowns.

im not surprised that earthquake insurance is not applicable because it's a fairly common thing happening in japan. even if there was earthquake insurance available to them, i'm sure that in the contract it would have stated that it will be compensated only when property sustained damage when it was a low scale quake. if they were to allow compensation for high scale quakes, given the extent of the damage that a high scale quake creates, the insurance company would have gone bust. risk management in a company, i assume, would allow such a thing to happen.

according to wiki, homeowners are offered to take up an earthquake rider in addition to their fire insurance. but these are rental buildings.. so...

my concern would be more about now that the containment vessel has breached, how will it affect the properties. like the cost of decontaminating the properties.

me and my big mouth that saizen reit is gng to take a long time to appreciate. frowns.

AK71 said...

Hi Raelynn,

You are right about how Saizen REIT could take a long time to appreciate and even more so now.

Given the worst case scenario I suggested, which is the total loss of all 28 buildings in the affected area, I am mentally prepared for a 15% loss to the REIT's NAV and income distribution.

Anonymous said...

Hi All and AK

Sorry, I did not include my initial

I am cheongwee.

Sell is the wise choice.Withdraw, then you can thk better.

Stock is always there, but not if your capital gone with the nuclear meltdown. You be out for good.

I am not here to sadden you ppl, but am speaking as a season mkt player.

Stop listening to those who say, mkt always come back.Even expert

Sometime it is true, but if it is , your gain is mininum, but if not, your lose is great.

Look if you vested during the previous high, you are still sittng on loses.

good luck

AK71 said...

Hi Cheong Wee,

I am always glad to hear from seasoned market players. Thanks for sharing your POV. :)

Paul said...

Hi AK71

I wish I can share your optimism. And bravery (or some may say foolhardiness).

Only time will tell if your optimism is correct.

Regardless of whether the properties are a complete write-off or not, it will be a while before they can generate rentals. And this will have an impact on their income and ultimately their DPUs.

Whatever the investment merits, I think its tough for Saizen to rise in value; at least not until all the outstanding warrants expired.

I'm vested and was looking to divest before the earthquake struck. I din manage to divest and is still contemplating my next move.

I enjoyed reading yr blog and thoughts. Partly becos I am vested in many shares you blog about. Do keep up the good work!

AK71 said...

Hi Paul,

Thank you very much for the comments. I am glad you enjoy reading my blog. :)

With Saizen REIT, all I have done is to build in a worst case scenario. So, I do not think I am optimistic at all since the worst case scenario involves the complete write off of the 28 properties in the affected area.

I do not know if things would get worse than this but I feel that to sell now is probably selling close to the floor, if not the bottom.

Anyway, I make my investment decisions based on the little ideas in my head. For sure, I am only human and I have been wrong before. So, this is where hoping for the best comes in. :)

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