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Tuesday, March 30, 2010

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:

CompanyMaturity DateInterest RateLoan Amt (JPY mil) Interest Amt (JPY mil)
GK ChoseiMay 20113.30625%454.815.036825
GK ChoanJul 20112.66%5,900.0156.94
YK JOFSep 20193.50%1,000.0 35
GK ChogenMar 20233.075%317.4 9760.05
YK ShintokuMaturity Default7.07%7,253.2 512.80124
Total:15,511.7729.54


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).

6 comments:

  1. Hi JW,

    You have dissected Saizen REIT and presented all the numbers in a most organised manner. All of the REIT's secrets are laid bare for everyone to see. I could not have done it better myself. ;)

    Saizen REIT is still unloved. People would give a cursory glance at its numbers and throw it aside and most would not even glance at the numbers.

    Although I started accumulating units in Saizen REIT at 13c, I am still buying today at 16.5c. People wonder why. If they read my blog posts on Saizen REIT and, now, this blog post of yours, they would know why. :)

    Well done, my friend, and welcome to the Saizen REIT club. :)

    ReplyDelete
  2. Welcome to the club..

    I am also trying to accumulate Saizen REITS...

    At the moment, me trying to accumulate at 0.165 as well...

    April will be the month for Saizen...

    ReplyDelete
  3. Hi JW,

    Thanks for the analysis. Great work there! :)

    I have some worries though:

    Saizen has defaulted on the debt for YK Shintoku, to the tune of JPY 7,253.2 million. There is another massive debt of JPY 5,900.0 million due for GK Choan in Jul 2011 (slightly more than a year away). Given that Saizen has mismanaged YK Shintoku, I am not sure if GK Choan is in bad shape too.

    I could be unnecessarily cautious here. Any comments from anyone out there?

    Cheers!

    ReplyDelete
  4. Hi Zelphon,

    thanks for visiting. Took me quite a bit of research before joining the club :)




    Hi Dreamer,

    on hindsight, the loan might not really have been mismanaged. Saizen went heavy on CMBS loans earlier, and has decided to switch to traditional loans in 2007 before the crisis hit. However, before they could refinance, the crisis hit, and the CMBS structure sort of folded.

    REITs function on the basis of refinancing. Their underlying properties depreciate very slowly, unlike ships in shipping trusts.

    I'm positive that their YK Shintoku loan will be successful in refinancing. I also have this evil idea of soaking up some more warrants, then converting one day to let them have more funds to perhaps repay this YK Shintoku loan to reduce their gearing further. :)

    ReplyDelete
  5. Hi all,

    One additional safety margin to consider.
    The NAV is around 41 cents. This is based on its market value. In an earlier annual report, shareholders were given to understand that the current market price is well below construction cost.
    If you believe that market will always adjust itself to sane condition, the NAV will be adjusted upwards in years to come.

    lionshoe

    ReplyDelete
  6. Hi Lionshoe,

    thanks for leaving a comment. I took the NAV into account in my 4 scenarios :)

    ReplyDelete

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