Saizen REIT: 2Q FY2011 results.

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.