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Saizen REIT: Full Year 2011 results.

Wednesday, August 24, 2011

I have not blogged about Saizen REIT for some time now because there is nothing really significant to analyse after its CMBS for YK Shintoku was successfully paid up a few months ago.

I divested my investment in the REIT partially when its unit price rebounded after hitting a low in the aftermath of the triple disaster of earthquake, tsunami and nuclear crisis in March this year. This is because of the possibly more difficult economic circumstances which would plague the country as it feels the impact of the immense damage fully over time. Technically, it also looked as if further upside in unit price could be capped. As the situation lacks a level of clarity which I would require to invest with a peace of mind, partial divestment was the way to go.

Yesterday, Moody's cut Japan's government bond rating to Aa3 from Aa2. The new rating is three notches below Moody's top Aaa rating.

While pointing out that more than 90% of Japan's debt is held domestically, I have also acknowledged in the past that debts will have to be repaid in time as its ageing population draws down on its savings increasingly. While the downgrade by Moody's is hardly surprising and does not mean that Japan is collapsing in the immediate future, it does remind us that Japan's slide downwards has not stopped.

Having said this, I still retain a rather significant investment in Saizen REIT in absolute dollar terms as I still like the idea of having exposure to freehold residential property in a country where two thirds of its population rent the homes they stay in.

The REIT's gearing level has also dropped to just 24% and its NAV per unit (adjusted for warrants) is a relatively high 29c. Interest cover ratio is a tad low at 3.1x. DPU of 0.5c has been declared for 2H 2011 (payable on 16 Sep). An annualised DPU of 1c with a unit price of 14.9c would mean a distribution yield of 6.7%. Pretty decent.

In 1H 2012, six months later, we could see a higher DPU as a full six months income generated by YK Shintoku would be distributable to unit holders. However, bearing in mind that many properties were divested to repay its CMBS, some might question if such contribution would be significant? From memory, YK Shintoku had a very large portfolio of properties and, again based on memory, we could see DPU bumping up some 10% possibly.

The same rating agency that downgraded Japan's debt rating raised Saizen REIT's debt rating from Caa1 to B1. This is good news as it could make financing more readily available and at a lower price for the REIT. The management has mentioned its desire to raise gearing level to 35% and the better rating should help.

Saizen REIT remains a recovery story in the making. We can only wait and see if the expected more difficult economic conditions in Japan will present any challenges for the REIT in time.

Read article here:
Moody's downgrades Japan's debt rating citing large budget deficits and government debt.

See Full Year 2011 presentation slides: here.

Related articles:
Japan's debt issue and Saizen REIT.
Sanity prevails with more good news.


Marco said...

I'm considering to invest into Saizen REIT, in view of its freehold properties, locations as well as strengthening currency (Japan yen).

What will be the ideal price to go in at this present moment?

No worries, I am a matured investor, will be responsible on my own decision, just seeking out advise from guru like you.

AK71 said...

Hi Marco,

Saizen REIT today is stronger in its balance sheet than two years ago. However, it is difficult to say if near term macroeconomic conditions in Japan could stay supportive although demand for Saizen REIT's residential properties is likely to be rather inelastic.

Technically, Saizen REIT's unit price sees some significant resistance in a band between 15c to 16c. Strong support is seen at 13c. So, it is closer to resistance than support at the moment.

With the new Prime Minister set on weakening the JPY, even with the expected income contribution from YK Shintoku in the next six months, we might not see a significant increase in DPU.

I might consider increasing my exposure to Saizen REIT if its unit price is closer to 13c. With a DPU of 1c, that would give me a distribution yield of 7.7% which is pretty decent.

Marco said...

Thanks AK. 13c or below would be an attractive price for go in.

AK71 said...

Hi Marco,

You are welcome and good luck. :)

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