Saizen REIT Analysis Part 2

Saizen's Debts

As of now, debts have been repaid (the CMBS loans) for YK Shinzan, YK Kokkei and YK Shingen. For YK Keizan, it is expected to be finished in payments by Apr 2010. The main worry is the defaulted loan of nearly 7 billion yen in YK Shintoku, although it appears to be much less of a concern now as refinancing seems more and more viable.

As of 2Q2010, Saizen has about 15.5 bil of debts and 42 bil in property, giving us a 36.9% gearing at the moment. This has reduced a lot, and is starting to look more favourably to me than before.

Saizen will then be left with the following debts after the repayment of the YK Keizan loan:

Company	Maturity Date	Interest Rate	Loan Amt (JPY mil)	Interest Amt (JPY mil)
GK Chosei	May 2011	3.30625%	454.8	15.036825
GK Choan	Jul 2011	2.66%	5,900.0	156.94
YK JOF	Sep 2019	3.50%	1,000.0	35
GK Chogen	Mar 2023	3.075%	317.4	9760.05
YK Shintoku	Maturity Default	7.07%	7,253.2	512.80124
		Total:	15,511.7	729.54

As we can see, the YK Shintoku loan itself accounts for nearly half the total amount of debts.

For 2Q2010, the interest amount was around 236 JPY mil. For thie 3Q2010, I would expect it to be 729.54/4 = 183 JPY mil, a decrease of nearly 50 JPY mil (when the YK Keizan loan is fully paid up).


My calculations for the expected dividend yield in the future:
Given that the quarterly net income from operations = 364 JPY mil
or nearly 1.45 JPY Bil per annum...
on a payment of about 236*4 = 0.944 JPY bil per annum,

And assuming ceteris paribus, where no new acquisitions or sales occur.
And on the more optimistic note that there will be no foreclosure for YK Shintoku.
And assuming YK Shintoku's loan isn't paid up with internal cash resources and other free cash flow, something which I highly doubt, but taken into consideration for safety margin.

Scenario 1: No more warrants exercised, no refinancing of YK Shintoku Loan yet
Per annum interest: 0.730 JPY bil
Per annum Net Income: 1.45+0.944-0.73 = 1.66 JPY bil
Number of shares: 1 bil (rounded up)
Net income per share: 1.66 JPY or 0.023 SGD (S$1 to 70 JPY)

Assume 60% dividend payout: 0.0138 SGD or 8.36% at 0.165 SGD
Assume 70% dividend payout: 0.0161 SGD or 9.75% at 0.165 SGD
Assume 80% dividend payout: 0.0184 SGD or 11.15% at 0.165 SGD
Assume 90% dividend payout: 0.0207 SGD or 12.54% at 0.165 SGD
NAV (SG): 40c (0.165 is 58.7% discount to NAV)
Gearing: 36.9%


Scenario 2: No more warrants exercised, refinancing of YK Shintoku Loan at 4% interest rate
Per annum interest: 0.51 JPY bil
Per annum Net Income: 1.45+0.944-0.51 = 1.87 JPY bil
Number of shares: 1 bil (rounded up)
Net income per share: 1.87 JPY or 0.0267 SGD (S$1 to 70 JPY)

Assume 60% dividend payout: 0.01602 SGD or 9.71% at 0.165 SGD
Assume 70% dividend payout: 0.01869 SGD or 11.3% at 0.165 SGD
Assume 80% dividend payout: 0.02136 SGD or 12.94% at 0.165 SGD
Assume 90% dividend payout: 0.02403 SGD or 14.56% at 0.165 SGD
NAV (SG): 40c (0.165 is 58.7% discount to NAV)
Gearing: 36.9%


Scenario 3: All warrants exercised, no refinancing of YK Shintoku Loan yet
Assume proceeds of warrants used to pay YK Shintoku's debts
Per annum interest: 0.549 JPY bil
Per annum Net Income: 1.45+0.944-0.549 = 1.835 JPY bil
Number of shares: 1.5 bil (rounded up)
Net income per share: 1.22 JPY or 0.0175 SGD (S$1 to 70 JPY)

Assume 60% dividend payout: 0.0105 SGD or 6.35% at 0.165 SGD
Assume 70% dividend payout: 0.0122 SGD or 7.41% at 0.165 SGD
Assume 80% dividend payout: 0.0140 SGD or 8.47% at 0.165 SGD
Assume 90% dividend payout: 0.0157 SGD or 9.53% at 0.165 SGD
NAV (SG): 26c (0.165 is 40% discount to NAV)
Gearing: 30.9%


Scenario 4: All warrants exercised, refinancing of YK Shintoku Loan at 4% interest rate
Assume proceeds of warrants used to pay YK Shintoku's debts
Per annum interest: 0.405 JPY bil
Per annum Net Income: 1.45+0.944-0.405 = 1.979 JPY bil
Number of shares: 1.5 bil (rounded up)
Net income per share: 1.32 JPY or 0.0188 SGD (S$1 to 70 JPY)

Assume 60% dividend payout: 0.0113 SGD or 6.85% at 0.165 SGD
Assume 70% dividend payout: 0.0132 SGD or 7.99% at 0.165 SGD
Assume 80% dividend payout: 0.0150 SGD or 9.14% at 0.165 SGD
Assume 90% dividend payout: 0.0170 SGD or 10.28% at 0.165 SGD
NAV (SG): 26c (0.165 is 40% discount to NAV)
Gearing: 30.9%


I believe 0.165 should be a happy price to buy in :)
Supposed Saizen were to use it's extra cash flow to start repaying its debts to reduce gearing, there would be even less interest payments together with a reduced gearing. This will enable it to acquire more yield-accretive assets in the future.

In my opinion, Saizen would likely not call for any more rights issue in the very near future for it would incur the wrath of shareholders (if they care about the shareholders).

The potential dividend yield is indeed attractive (excluding any possible future gains or dips in it). Furthermore, the discount to NAV looks good. To me, buying at NAV of a REIT (not business) is almost the same as buying a piece of real estate at market valuations. Buying above NAV is almost the same as paying cash on valuations. Buying below NAV would be analogous to buying below market valuations for the real estate.

At 0.165, there's still a buffer of more than 30% discount to the NAV, which is a nice enough safety margin.

Also, even if the warrant proceeds do not go into repaying the loans, it would still likely go into more yield accretive acquisitions, which would still improve the yield.


All in all, there are still quite a number of uncertainties. However, as with all investments, uncertainties and risks always manifest themselves somehow. With these calculations and the price of 0.165, I'm willing to take the risk to enter. The odds look good enough for me to take this plunge.

I will be waiting to load in 40 lots of Saizen to keep for a potential 7.4% yield (assume scenario 3 with 70% payout).