Friday, March 26, 2010

My initial thoughts on Saizen REIT

Saizen REIT Initial Analysis

After some calculations last night, I discovered that their net income from operations per annum is only about 2+ cents per share if none of the warrants are exercised, and 1.55 cts per share if all the warrants are exercised.

Let's take an average of 1.8 cts if half the warrants are exercised. This gives us an net income from operations of 10.9% on the unit price.

A distribution of say 90% will give about 9.8% dividend yield! Sounds exciting? Let's see:

My main concerns are:
1) Yen is strong now... it could get weaker, and erode the dividend yield over time. Here's the chart from Yahoo:

2) There's no incentive at all for Saizen to distribute >90% of their distributable income, because they don't get any tax relief as their assets are all based overseas (namely, Japan)

3) There's high gearing at the moment of 16.8 JPY bil loans over 42 JPY bil worth of assets. This is equal to 40% gearing, which is rather high in my opinion.

Supposed they pay in full the YK Shintoku loan of 7.9 billion Yen without further borrowings, something which I highly doubt, the gearing would be 23.8%. Sufficiently low.

Sure, they are paying their debts and looking to refinance their YK Shintoku loan, but the per annum interest of roughly 550 JPY mil wouldn't increase their net income from operations substantially (about 384 JPY bil per quarter). They would have to take on some more debts to make yield accretive purchases, which doesn't look very probable at the moment.

To me, a 60% distribution would sound more likely and prudent given that the issue of the defaulted loan is still unresolved. So with that same assumptions as above, investors would probably get a 6.54% dividend yield with a 60% distribution.
  7.63% and 8.72% dividend yield for 70% and 80% distribution respectively.

All these assuming only half the warrants are exercised.


  1. Your calculations regarding Saizen REIT's income is correct.

    I have some thoughts about your concerns:

    1. The Yen went to a high of S$16 per JPY1000. The lowest I have ever had it was S$13 per JPY1000 but I think those days are over. We have to understand why the JPY was so cheap in the past. It was used for carry trade. So, people were selling JPY to buy other currencies or assets in other currencies. Now, people are using the US$ instead for carry trade.

    2. There is no "requirement" for Saizen to return 90% of its distributabe income for the reason you mentioned but there is a huge "incentive" for Saizen to retun 90% of its distributable income due to the vested interests of the managers and substantial shareholders. ;)

    3. I do not think they could repay YK Shintoku's CMBS without having to take on new loans. That would be delusional. I expect them to re-finance the CMBS with conventional bank loans with lower interest rate. I am optimistic that this could easily half the interest payable on YK Shintoku alone. The interest saved, I have calculated, would bump up the yearly distributable income by some 15 to 20% (depending on what is the effective borrowing cost)! That excites me!

    Like I mentioned before, if one does not feel comfortable with something, don't put any money in it. :-)

  2. Hi AK71,

    I will update on 2nd post on Saizen.

    According to my calculations, it seems like the YK Shintoku loan issue, if solved, would only bump up the distributable income by about 1%, not 15%...

    Let me look through it again and post it out.

  3. Hi JW,

    It would depend on the way in which the issue is solved. It is even possible that solving the issue would not increase the distributable income at all. ;)

    I wait with bated breath for your next post on Saizen REIT.


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