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Saizen REIT: 3Q FY2011 results.

Sunday, May 15, 2011

(Something is wrong with Blogger. This blog post appeared on 13 May 2011, not 15 May 2011.)

As expected, YK Shintoku's CMBS is to be fully repaid very soon by end of May 2011. The repayment is funded by the REIT's internal cash resources (including proceeds from the exercise of warrants) and proceeds from the divestment of properties. It is expected that the operational cashflow from YK Shintoku's properties would contribute towards distributable income from the month of June 2011, therefore. Annually, this could bump up distributable income by some 10%.

I do not know if this would provide a positive catalyst to the unit price of the REIT. It could well have been priced in. Any upside could be capped at 15.5c which was the highest the unit price went to when the counter recovered from the panic selling which took place in the wake of the disastrous earthquake and tsunami.

It was revealed in its 3Q FY2011 report that JPY200m (S$3m) will be spent to repair properties affected by the disasters. It was also revealed that these would be funded by the REIT's reserves and would not affect income distributions.

How much is the estimated DPU for 2H 2011 payable sometime in September 2011? Distributable income for 1H 2011 was JPY383,858,000. Distributable income for 3Q 2011 came in at JPY187,213,000. If we simply double it, we would have JPY374,426,000. This is slightly lower than for 1H 2011 due to the continuing divestment of properties. However, 4Q 2011 would probably see 1 month of income contribution from YK Shintoku's properties. This could make up the difference.

In 1H 2011, we had a DPU of 0.52c. If distributable income remains largely the same for 2H 2011, we could see a lower DPU. This is due to a larger number of units in issue after the exercise of almost 52,000,000 warrants, seeing an increase of some 4.6% (which suggests a potential DPU of 0.5c).  A complete exercise of all warrants could see a further 23% decrease in DPU (which suggests a potential DPU of 0.385c). This is assuming that the exchange rate between the JPY and S$ remains largely the same as in 1H 2011.

In 2012, however, we should see the full contribution from YK Shintoku's properties which would bump up the distributable income by some 10% in all instances. We must not forget also that due to the amortising nature of Saizen REIT's loans, the distributable income is some 33% lower than what it could be.

Over time, distributable income in JPY terms is most probably going to increase. Imagine if the REIT were allowed to pay only interest on its loans and not make any capital repayment. The distributable income would be higher by 50%! Now that the REIT is made to amortise its loans, it would have smaller interest repayments in future as the loans would reduce in size. One has to think long term in order to appreciate the attractiveness of the arrangement.

Saizen REIT remains an investment that would appeal to anyone looking to invest in freehold residential properties in Japan with a relatively attractive yield. In FY2012, assuming all warrants were to be exercised, expect a full year DPU of approximately 0.385c x 2 + 10% = 0.85c, which at the REIT's current unit price of 14.5c means a distribution yield of 5.84%. This is premised upon the JPY staying strong against the S$, however.

I still have a large investment in this REIT although much smaller than before. It would be interesting to see what is the DPU when 4Q 2011 results are announced in another three months from now. It would also be interesting to see how the market would react to the REIT's results. Good luck to fellow unitholders.

See Saizen REIT's quarterly announcement here.


Anonymous said...

Hi AK,

Few questions to ask you :

1)They have mention that the cash generated from YK Shintoku has not been distribute for dividend. But according to the Statement of distributable income from operation, they have remitted all the cash generated. Am i right.

2)How do you derive your increase of 10% in dividend from clearing of YK Shintoku loan.

3)Why did Saizen have to make principle repayment on their loan instead just interest payment?

4)What is the financial benefit from repaying the CIMB loan of ~7%.

I understand that you are not the investor relation mgr but please share your view.


AK71 said...

Hi K,

1. Income from YK Shintoku is not distributable to unitholders as the CMBS is in default. The last two income distributions did not include income from YK Shintoku.

2. I said this based on memory which is not totally reliable. Thanks for asking this question as I went back to one of my earlier blog posts "3Q 2010" for verfication. Indeed, YK Shintoku's income could bump up total distributable income by about 20% and not 10%. I have not done an up to date calculation since many properties in that portfolio have been divested since the date of the blog post.

3. The amortising feature of Saizen REIT's loans are probably a condition set by the lenders. This, in the longer run, is a good thing for the REIT and its unitholders.

4. Repaying the CMBS would mean that YK Shintoku becomes unencumbered and that its income would be distributable to unitholders. It would also mean that it is free of the punitive 7% interest payments.

k said...

Hi Ak,
thank you for ur ckarification.

However,back to qn1 of my qn.

According to saizen mgmt, they mention that the cmbs income has not been distribted as divendend.

But i have analyse their report and found that all cash flow generated is distributed as dividend instead of what they have say above. (ath ¥100m/qtr is use to repay other bank loan)

How i read the report is from their "statement of distributable income".all is utilised. So where is the cash reserve for the cmbs?

Thank again for ur time to explain to me.


AK71 said...

Hi K,

It is perhaps clearer in their presentation:

Presentation: 3Q FY2011.

Income generated by YK Shintoku's properties goes to paying the 7.07% interest on the defaulted CMBS. Remaining operational cashflow goes to paying down the CMBS.

I hope this helps. :)

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