Saizen REIT

[Musicwhiz]

Hi Zelphon,

Please refrain from typing in CAPS as this constitutes yelling.

Thank you.

[piggo]

Yes ag88 you've calculated correctly, though whether its a gem is very subjective :p the reason why it is undervalued with its yield is because it is not without risks.

The ability to obtain loans is quite important for a reit, and saizen does not have a good credit rating. One of the possible catalyst would be a rerating after they settle the shintoku loan. Even with a good rating, it seems hard to get bank loans in japan. They only require a ~80% loan to settle shintoku yet its been taking them so long, things are really different as compared to singapore so the current situation seems pretty stagnant if you ask me, but I'm quite happy with the possible perpetual yield I'm getting; unlike other reits, their properties are freehold and should hold up as long as ppl keep renting. If it ever approaches nav, it'll just be a huge bonus.

[momoeagle]

Hi dydx,

just to share my views:

"1. The underlying residential properties are small and not worth much individually. The fact that the properties are spread quite widely acoss Japan makes housekeeping/maintenance/servicing work and monitoring difficult for the management and costly."

The properties are not managed by Saizen itself, but by the local operators operating for such investors. Each province has their own property operator helping Saizen manage a group of residential properties. That's why we see YK Shintoku, etc.

"2. It is naturally more difficult for the Singaporean management team to maximize the earning potential and sale value of the underlying residential properties, as well as to minimize the maintenance and other expenses. This is the same in the area of seeking refinancing of the debts. There are amble evidences on this aspect from the recent sales of properties - most of them were below valuation - and the prolonged refinancing exercises todate."

The sale of properties were done rather "unwillingingly", but it is a necessary, and better move, than to hold on to the 7.07% defaulted CMBS loan for long term. Saizen still has unencumbered properties which it can use to make traditional bank loans (instead of CMBS loans), where it can use the loans (of lower interest) to pare down their final CMBS loans.

The refinancing process has been completed for most of the previous CMBS loans (which gave them their current problems). That signifies to me that Saizen has the ability to borrow, and Japanese banks have the ability to make the loans, for Saizen to be a going concern.


"Bearing in mind many people had bought into this Reit during its IPO at $1.00 apiece in 2007, I just can't help but feel quite sad for them. This Reit shouldn't have gotten approval to list on SGX in the first place!"

This REIT is just an additional vehicle for investors to access the japanese residential market. It's NAV is still near to 40c region, and I think it is quite unfair to conclude that it should not have gotten approval for listing.

If this is the argument for not approving the listing, then the same argument would have applied for the listing of chartered semiconductor too!

[dydx]

momoeagle,

If you have taken a bet on Saizen REIT for a potential rise in its price and a return of regular dividend payout - and if you have bought into the counter at a lower price - you have my best wishes.

But the fact remains that this Reit has a lot of its shareholders' value destroyed since its IPO (sponsored by Morgan Stanley) at $1.00 in Nov07, and it has paid out only 2 dividends to-date, and its dividend payment capacity has fallen substantially from the original promised basis in its IPO prospectus. With the benefit of hindsight, this Reit was wrongly structured by its orginal sponsors and Morgan Stanley, wrongly financed, and the qualities of its underlying earning property assets are poor.

When a company or Reit borrows money from a lender and the loan later goes into a problem, it cannnot exonerate its responsibility by blaming the lender (of the CMBS loans in this case). If the borrower is worth its salt, it should simply and quickly pay off the lender through whatever better means available, and move on. In this case, Saizen REIT has taken a long time to settle with the lenders of the CMBS loans. For this, I can't say anything good about their management.

To have an idea on the quality of Saizen REIT's property assets, we can simply refer to the latest disposal of a property asset - Kamei Five.....
http://info.sgx.com/webcoranncatth.nsf/V...3002D2163/$file/20101021_Announcement_Divestment_of_Kamei_Five.pdf?openelement
Kamei Five, sold for JPY70.4m (equivalent to $1.1m) which is 6% below its valuation of JPY74.9m (as at 30Jun10), is a building with 22 residential units, 2 commercial units, and 2 car parking units, located in Hiroshima, and earned JPY9.8m in revenue in FY ended 30Jun10. This appears to be a housing property that is worst than our HDB apartments!

It is simply naive and not good enough to buy into a Reit based on its high NAV/share vs. the current price!

[momoeagle]

Hi dydx, thanks for sharing your views. Here are my opinions:

"But the fact remains that this Reit has a lot of its shareholders' value destroyed since its IPO (sponsored by Morgan Stanley) at $1.00 in Nov07, and it has paid out only 2 dividends to-date, and its dividend payment capacity has fallen substantially from the original promised basis in its IPO prospectus. With the benefit of hindsight, this Reit was wrongly structured by its orginal sponsors and Morgan Stanley, wrongly financed, and the qualities of its underlying earning property assets are poor."

At the moment, shareholders value is indeed destroyed. No doubt. That's one reason I don't like to buy into IPOs or near IPO prices, especially when it is not supported by Ah Gong.

So far, the only near IPO price share I have from recent times is KGT

However, I beg to differ that the qualities of its underlying earning property assets are poor. As seen from the link you posted, the property yield was greater than 10% at current valuations.




"When a company or Reit borrows money from a lender and the loan later goes into a problem, it cannnot exonerate its responsibility by blaming the lender (of the CMBS loans in this case). If the borrower is worth its salt, it should simply and quickly pay off the lender through whatever better means available, and move on. In this case, Saizen REIT has taken a long time to settle with the lenders of the CMBS loans. For this, I can't say anything good about their management."

Immediately after IPO in 2007, Saizen has recognized the potential dangers of CMBS loans, and had started working to replace their CMBS loans with traditional bank loans. However, as circumstances would have it, their plans were stopped by the recent crisis when banks simply stopped giving new loans, and thus the delay. Banks only started to loan again after the 2009 crash.

In my opinion, the REIT has indeed started off on a bad note with CMBS loans, but the problem was recognized, and attempted to be rectified, albeit just before the crisis. Banks would want not to issue new loans at uncertain times.

At the moment, Saizen has establised new banking relationships. Whether their banks will honour the new relationships if another crisis strikes is another story.






"To have an idea on the quality of Saizen REIT's property assets, we can simply refer to the latest disposal of a property asset - Kamei Five.....
http://info.sgx.com/webcoranncatth.nsf/V...penelement
Kamei Five, sold for JPY70.4m (equivalent to $1.1m) which is 6% below its valuation of JPY74.9m (as at 30Jun10), is a building with 22 residential units, 2 commercial units, and 2 car parking units, located in Hiroshima, and earned JPY9.8m in revenue in FY ended 30Jun10. This appears to be a housing property that is worst than our HDB apartments!

It is simply naive and not good enough to buy into a Reit based on its high NAV/share vs. the current price! "

I wouldn't say I know Japanese properties well, but we cannot compare apple with orange, i.e. comparing japanese residential properties with Singapore residential properties. Saizen is mainly focussed on what we call mickey mouse units in Singapore, and they rent their properties to professionals or small families who would want to stay nearer to their workplace, yet unable to afford the high property prices in Japan.

As for Kamei Five, a JPY70.4m property that yields JPY9.8m in revenue per annum gives greater than 10%! No matter how bad one might say Saizen properties are, this is the number and percentage yield I see. I highly doubt a local HDB can give you as high a yield at current valuations if we are to compare with Singapore.


Also note that the most recent quarterly dividend amount was for two months, and excluded any revenue from YK Shintoku. That itself signifies the potential yield can be much higher, given YK Shintoku is a big portfolio in itself.

[kazukirai]

Kamei Five, sold for JPY70.4m (equivalent to $1.1m) which is 6% below its valuation of JPY74.9m (as at 30Jun10), is a building with 22 residential units, 2 commercial units, and 2 car parking units, located in Hiroshima, and earned JPY9.8m in revenue in FY ended 30Jun10.

Slightly off topic but $1.1m sgd buys you 22 residential units, 2 commercial units and 2 parking car units?! I did a double-take when I saw this.

These units must be mini-mickey mouse ones. Also 2 carpark units for 24 units? What kind of tenants are they catering for? Hiroshima is evidently not anything like Tokyo from this example. Also, the JPY9.8m revenue for one year works out to be some SGD542 per mth per unit (simple back of the envelope calculations).

It looks like this property is pretty representative of the Japanese economy and society at large. Decaying and aging at the fringes while growth will probably become more and more concentrated in the big cities given their current immigration policies.

Koh-san, what's your take on this?

[RSeth]

But the fact remains that this Reit has a lot of its shareholders' value destroyed since its IPO (sponsored by Morgan Stanley) at $1.00 in Nov07, and it has paid out only 2 dividends to-date, and its dividend payment capacity has fallen substantially from the original promised basis in its IPO prospectus. With the benefit of hindsight, this Reit was wrongly structured by its orginal sponsors and Morgan Stanley, wrongly financed, and the qualities of its underlying earning property assets are poor.

When a company or Reit borrows money from a lender and the loan later goes into a problem, it cannnot exonerate its responsibility by blaming the lender (of the CMBS loans in this case). If the borrower is worth its salt, it should simply and quickly pay off the lender through whatever better means available, and move on. In this case, Saizen REIT has taken a long time to settle with the lenders of the CMBS loans. For this, I can't say anything good about their management.

Dydx, this 2 paragraphs are all about hindsight. I dun know much abt Saizen but I guess that whatever you "criticised on", its much easier said than done. Their CMBS debts is not like our housing loan... can get refinancing by filling in some forms.

To me, as long as the manager is considered honest, I won't want to be paralysed by over-analysis and will just scratch the surface on a REIT. Since > 90% of income are paid out in a REIT, there leaves not much room for unpleasant surprises. Saizen is unique in that they bombed but they were done in by the collapse of CMBS during the financial crisis.

So how would you compare the management of Cambridge and Saizen... both can do 9% yield on theory.

I dunno both managements, but I will take on Saizen anytime for that 9% theoretical yield (or 7% post dilution if all wrt holders convert). Simply becuase Saizen mgt are very upfront in their Investor Relations + they have been buying up the shares in open mkt. Cambridge? I will not touch w a 10 feet pole.

[momoeagle]

I refuse to touch Cambridge ever since I see their actions of posting full page ads against MI-REIT, now AIMSAMPIREIT

[edentity]

My 2 cents:

Some statistics I pulled off the Saizen REIT AR2010:

Kamei 5:
Year Built: 1989
Purchase Consideration: 139.0 million yen
Current Valuation: 74.9 million yen
Residential Units: 22
Commercial Units: 2
Parking lots: 2
GFA: 522 sq.m
NLA: 449 sq.m
Occupancy: 92%
Annual Rental Income: 9,925,800 yen
As % of total rental income: 0.3%

From here I gathered that the yield on cost for Kamei 5 is around: 7.1% (Total portfolio yield on cost is: 7.3%)
Also the rental per square metre for Kamei 5 is around: 1,840 yen per month (Total portfolio average rental psm is: 1,480 yen)

Saizen now trades at 0.4x PTB, and NTA is 76% of the purchase consideration.

While the discount to book is attractive and I do agree on the management being open and forthcoming (competency is another matter), I wonder what are the catalysts for Saizen, cause it seems to me that its property valuation will not increase, nor will rental rates. One (and only?) possibility will be the refinancing of YK Shintoku, thus improving DPU (to around 1 to 1.2 cents?)

At $0.155, a DPU of 1.2 cents would represent a yield of 7.7%.
To me, the current price seems to reflect the fair value of Saizen going forward (i.e. with YK Shintoku refinanced).

[dydx]

So how would you compare the management of Cambridge and Saizen... both can do 9% yield on theory.

Well, I don't suppose investors should buy into a Reit simply based on dividend yield. Personally, I would apply the following approach to select and analyze Reits -

1. choose wisely the types of the underlying property assets - clear preference for well located commercial properties, with shopping malls preferred over office space.

2. look into the quality aspects of the underlying property assets - clear preference for large size, good design/architecture, relatively new, well maintained, low-cost maintenance.

3. the Reits should have purchased the underlying property assets at fair prices when compared with historical prices and current market valuation.

4. better still if the underlying property assets carry potential for appreciating in value or fetching higher resale prices due to redevelopment or enhanced value possibilities of the sites.

5. Current yield based on DPU, and potential for increasing DPU in the future.

As for Saizen Reit, it is scary the extent of the valuation of the underlying property assets has fallen below their original purchase costs since IPO. Take a good look into p30 through p37 of the latest FY10 AR.....
http://info.sgx.com/listprosp.nsf/07aed3...f00254ed2/$FILE/Saizen%20REIT%20AR%202010.pdf
, you will know what I mean.