Saizen Reit

AmFraser Securities, Nov 11

FOR the quarter ending September 2013, Saizen reported a 6.2 per cent and 5.3 per cent y-o-y increase in its gross revenue and net property income, respectively. This was supported by the acquisitions of five properties between November 2012 and June 2013. We note that Saizen Reit's Q1FY14 results were broadly within our expectations, with actual revenue and net property income 0.7 per cent and 2 per cent higher than our forecasts, respectively.

Stability remains the key element at play. We are continuing to witness improvements in rent reversions from new contracts inked at Saizen Reit. Overall rent reversions of new contracts entered into Q1FY14 were marginally lower by about 0.3 per cent from previous contracted rates (Q1FY13 and Q4FY13: lower by about 1.3 per cent and 0.4 per cent, respectively).

More notably, rent reversions have improved to positive 0.04 per cent and 0.7 per cent in August 2013 and September 2013, respectively - an improvement from a negative reversion of 1.9 per cent in July 2013. Average occupancy rates have also held steady at 91.2 per cent in Q1FY14, compared with 91.7 per cent in Q1FY13.

Yen depreciation remains a key risk. As it seeks to minimise the impact of the volatility in the yen/Singapore dollar rate on its upcoming distributions, Saizen Reit has entered into a hedge for its distribution payment ending Dec 31, 2013, at S$81.15/yen. For the subsequent distribution for the period ending June 2014, it has also been hedged at a rate between a cap of JPY82/S$ and JPY76.18/S$.

We expect Saizen Reit's H1FY14 DPU to increase by 8.7 per cent y-o-y in yen terms. However, this will be offset by a 8.2 per cent increase in the hedged rate compared with the corresponding period in H1FY13. Hence, in S$ terms, we expect Saizen Reit's H1FY14 DPU to be largely flattish compared with its H1FY13 DPU.

With a cash pile of 5.4 billion yen, Saizen Reit could certainly engage in acquisitions to accelerate its distribution growth. We are currently pencilling in 2.3 billion yen of acquisitions at a 6 per cent NPI (net property income) yield.

Unit consolidation completed. On Oct 30, 2013, Unitholders approved the consolidation of every five existing Units into one Unit, and this was completed on Nov 8, 2013. We adjust our FV and projected DPU accordingly to S$0.96 and 6.72 cents, respectively.

Maintain "hold" on FV S$0.96. We lower our exchange rate assumption from JPY76.9/S$ to JPY79.3/S$ and our projected FY14 DPU of 6.72 cents translates into a yield of 7.3 per cent. Our fair value of S$0.96 translates into limited capital upside of 3.7 per cent. Together with its projected yield of 7.3 per cent, this gives us a potential total return of 11 per cent. Hence, we maintain HOLD on FV of S$0.96.

HOLD

Saizen Reit

AmFraser Research, Aug 26

SAIZEN's gross revenue and net property income increased by 9.7 per cent and 13.6 per cent, respectively, in FY2013, largely supported by its acquisitions of seven properties. For the six months ending June 30, 2013, Saizen declared a distribution per unit (DPU) of 0.63 cents, amounting to a full-year DPU of 1.29 cents. This is marginally higher than our projected FY2013 DPU of 1.24 cents.

In FY2013, overall rental reversions of new contracts were marginally lower by about 0.5 per cent. This marks an improvement from rental reversions witnessed in FY2012, during which rental reversions were lower by 2.1 per cent. Given our cautiously optimistic outlook on the Japanese residential market, we maintain our assumption of flat rental reversions across Saizen's portfolio.

FY2014 will witness the full-year contribution of Saizen's recently acquired properties. Sitting on a cash pile of six billion yen (S$78 million), Saizen could tap on its cash balance to engage in immediately yield-accretive acquisitions. Moreover, Saizen has unencumbered properties valued at two billion yen, further strengthening its financial clout. We are currently pencilling in 2.3 billion yen of acquisitions at a 6 per cent NPI yield.

To provide its unitholders with greater visibility on distributions, Saizen has entered into hedging transactions for its upcoming distributions. The distribution payment for the period ended June 30 has been hedged at an average rate of 75.12 yen per S$ and the subsequent distribution is hedged at an average rate of 81.15 yen per S$, which compares unfavourably with the current rate of 77.14 yen per S$. This would inevitably weigh on Saizen's FY2014 DPU in S$ terms.

While we expect Saizen's H1 2014 DPU to grow by 2.8 per cent y-o-y in yen terms, this will be offset by a 8.2 per cent increase in the hedged rate. We currently project Saizen's H1 2014 DPU at 0.63 cents, that is 4.5 per cent lower than H1 2013 DPU.

Accompanying its latest results, Saizen proposed a unit consolidation involving the consolidation of every five existing units in Saizen Reit held by unitholders into one unit, subject to regulatory and unitholder approvals. The motivation behind such a proposed move is to reduce the magnitude of a single tick move on Saizen's share price, and thus its perceived volatility. The share consolidation is expected to be completed in November 2013.

We roll over our estimates and lower our target price to S$0.195 on the back of a higher riskfree rate of 2.7 per cent, implying a capital upside of only 6 per cent. In our opinion, Saizen's current yield level of 7 per cent, which translates into approximately 430 basis points over the risk-free rate, does not yet sufficiently compensate investors for the inherent macro, forex and interest rate risks. Maintain "hold".

HOLD