Saizen REIT: Update on properties in Sendai, Koriyama and Morioka.

Panic selling of units of Saizen REIT from the opening bell this morning was evident as price gapped down and started the day at 13.5c. As of now, it seems to have found support at 13c, the price at which I started investing in the REIT in 2009.

The management of the REIT has issued an update on the situation in Japan:

"The property managers have managed to view 6 properties so far, as set out below. Preliminary reports have confirmed that these 6 properties have sustained only minor damage and do not appear in any imminent danger of collapse. However, the full extent of damage can only be ascertained after more detailed assessments.

"The property managers have managed to view 3 out of 22 properties in Sendai....It should be noted that 11 out these 22 properties (with annual rental income of approximately JPY 152.8 million (S$2.4 million)) belong to the YK Shintoku portfolio. Revenues from YK Shintoku’s properties currently do not contribute to distributions. (This was a point I made in an earlier blog post as well. See it here.)

"The property managers have managed to view all 3 properties in Koriyama.... The property managers have not managed to view any of the 3 properties in Morioka.... It should be noted that 1 out these 3 properties (with annual rental income of approximately JPY 30.6 million (S$0.5 million)) belongs to the YK Shintoku portfolio." See announcement here.

The selling this morning is overdone but it is to be expected, I suppose. If I did not have a thorough understanding of the REIT's current financial standing and how much it could suffer on the downside in the worst case scenario, I could have been one of the sellers too. Good luck to us all.

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

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

There is much concern that the two nuclear power plants could suffer a meltdown. "However, experts said Japan should not expect a repeat of Chernobyl. They said pictures of mist above the plant suggested only small amounts of radiation had been expelled as part of measures to ensure its stability, far from the radioactive clouds Chernobyl spewed out 25 years ago." Read full story here.

"Favourable winds will likely blow possible radioactive pollution from a blast at a Japanese nuclear power plant out over the Pacific Ocean, the French Nuclear Safety Authority said Saturday." Read full story here.

Personally, I like to look at the worst case scenario. What if meltdown should happen at the two nuclear power plants? Would Saizen REIT have to abandon the buildings in the cities of Sendai, Koriyama and Morioka even if they were not destroyed by the earthquake and tsunami?

Looking at the above map, the two nuclear plants in danger of a reactor meltdown are Fukushima 1 and Fukushima 2. Authorities have, so far, said that areas beyond 20km of the reactors are safe. This could, of course, change in time.

Sendai is about 100km away from the two plants while Koriyama is more than 60km west of the plants. I checked Saizen REIT's website and found that Morioka is north of Sendai and is therefore farther from the plants.

It would be indeed optimistic to expect zero damage to Saizen REIT's properties in the biggest earthquake to hit Japan in more than a century. This is undoubtedly a blow to Saizen REIT but the reduction in NAV and loss of rental income should be capped at about 15%. Now, knowing that the properties, if still whole, are safe from any repercussions of a nuclear meltdown at the two plants is a consolation.

In an earlier blog post, I suggested that the reduction in income distribution to unitholders could be less severe than first estimated as 13 of the 28 possibly affected properties are in the portfolio of YK Shintoku which is currently not making any contribution to income distribution. However, there would be costs involved in the restoration of the buildings affected, if restoration should be a viable option. This could impact income distribution although the extent of the impact is hard to estimate at the moment. We will have to wait for a more detailed report by the management this week.

Related posts:
Saizen REIT: Properties in Sendai and YK Shintoku.
Earth shattering news: Japan's earthquake and Saizen REIT.