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Saizen REIT: Can we make some money from arbitrage?

Tuesday, November 3, 2015

Saizen REIT is suddenly getting a lot of attention. This is certainly a far cry from the time when I first blogged about it in 2009.

Now, with a price of $1.10 a unit, many are wondering if they could benefit from arbitrage.

Buy at $1.10, get one round of income distribution and get to receive $1.17 sometime middle of next year.

In a comment I made last evening in my last blog post on Saizen REIT, I said that we might not get $1.17 a unit next year because the buyer will only pay 95% of the consideration with the balance 5% to be retained in an escrow account.

Basically, if the buyer should identify some engineering work required for the assets being acquired, they have the right to draw upon the money in the escrow account for remedial work. They will have 28 days to do this.

We can only hope that there isn't that much engineering work required and that most of the money in the escrow account would be released to Saizen REIT in due course.

There was also a worry about exchange rate and how a weaker JPY in the next few months could affect payment to shareholders in S$.

This is no longer a concern because the very prudent management at Saizen REIT have entered into a currency hedging arrangement.

So, for those who would like to buy into Saizen REIT to enjoy some arbitrage benefit, what should we do?

Anything below $1.11 would be safer. Buying at prices higher than that would be making a wager on the buyer not drawing too much upon the funds in the escrow account.

Finally, take heed the warning provided by Mr. Chang Sean Pey that there is no assurance or certainty that the transaction will be completed. So, trade with caution.

See: Hedging arrangements.

Related post:
Saizen REIT: Firm offer by Lone Star.


la papillion said...

Hi AK,

Sensible and well thought out :) I got in at 1.09 - hope it's safe lol

AK71 said...

Hi LP,

See the last paragraph, even those who got in at 93c before the trading halt are not safe. LOL.

Maybe, that is why so many people are offloading their stakes. ;p

Siew Mun said...

I am comforted that the manager announced they hedge the exchange rates for the Proposed Transaction close to the offer price $1.172.

AK71 said...

Hi Siew Mun,

It definitely lends certainty and takes out most of the guesswork as to how much we could eventually receive. :)

Yisien said...

Hi AK,

I am an investor from Malaysia =)
I bought Saizen back when it is at 0.825 and hoping for all the dividends for long term. However, this happened. Since there are still uncertainty for the acquisition, what if i sell it at around 1.10 and lock the profit? Just looking for some opinion because i am still new here. Thanks.

caelitus said...

Such a low percentage over the NAV which was last valued in ?? I will not budge especially given that J-REITS trade at a lower yield. Vested for income and it is not worthwhile to get rid of the goose

AK71 said...

Hi Yisien,

Sell at $1.10 or wait? There is no right or wrong answer here. It depends on what you are looking for in Saizen REIT. ;)

AK71 said...

Hi caelitus,

If you have been following my blog, you might remember that Saizen REIT distributes income as if its loans are not amortising. This is not the case with comparable J-REITs.

If Saizen REIT were to distribute income like the J-REITs, we would see the distribution yield drop to about 4% at the old unit price of 85c a unit. Saizen REIT's distribution yield is engineered to be higher. ;)

If we have been waiting for the value to be unlocked, this is probably a good time to exit.

SMK said...

i don't think it is a good idea to arbitrage at this one.
i could be wrong.

AK71 said...


I don't know if it is a good idea or not but if we were to do it, it should be done with a margin of safety with the assumption that the transaction is going to be successful.

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