"Operationally, Saizen REIT is not losing money. I think this is what you are concerned about. In fact, it made more money than the same period last year. This is remarkable if you realise that it has done this after selling away five properties.
"Look at net income from operations. It is up 5.3%. What makes it looks bad is this: Net fair value loss on financial derivatives. This has a loss of JPY401.7m for the period reported.
"....... their explanation that this is for "mainly fair value losses on warrants of JPY 389.0 million, which arose due to the increase in market-traded price of the warrants."
"This really has no material impact on Saizen REIT real profitability. If you take the sum of JPY 389.0 million out, what you get is actually a profit....."
On estimating Saizen REIT's dpu (in Saizen REIT: March 2010 Presentation, 14 March 10):
"To estimate the distributable income, I look at the Income Statement. Nett income from operations in 2QFY2010 was JPY364m for the group. There was a reduction in nett income from operations in 2QFY2010 compared to 1QFY2010 due to the divestment of 5 properties by the manager.
"As Saizen REIT has defaulted on YK Shintoku's CMBS loan, I doubt it would be divesting anymore properties while seeking refinancing options. So, if you multiply 2QFY2010 nett income from operations by 4, we could estimate the full year total to be JPY 1,456m. Assuming Saizen REIT pays out 90% of its income, we arrive at JPY 1,310.4m. Please bear in mind that this is an estimate.
"At the end of February 2010, Saizen REIT had 952,799,055 units and 493,558,362 warrants in issue. Many are actually buying the warrants for capital appreciation with no intention of converting them into regular units in the meantime. So, if we do a simple division of the distributable income by the number of units in issue, we get JPY 1.38 per unit. Based on the prevailing exchange rate, we get Singapore 2c per unit. 1 JPY = 0.01516 SGD (provided by UOB). This translates into a yield of 12% based on the last done price of 16.5c.
"Of course, I expect the warrants to be fully exercised by 2012 which, incidentally, would provide Saizen REIT with more funds to bring down its gearing level or to fund yield accretive purchases then.
"Assuming that all warrants are fully exercised and nett operation income stays the same, estimated distributable income would reduce proportionally to 1.4c per unit. This translates into a yield of 8.5% on the last done price of 16.5c."
On refinancing for Saizen REIT (in Saizen REIT: March 2010 Presentation, 14 March 10):
"If I had the money, I would consider taking over Saizen REIT. It would be a steal compared to buying the underlying assets one by one as that would cost more. Buying the REIT would give me ownership of 161 apartment buildings in Japan at almost 60% discount to their current market values! Unfortunately, I don't have that kind of money.
"YK Shintoku's CMBS totals JPY 7,253.2m. That portfolio of properties is worth JPY 9,078.7m. That's a 20% difference. 7% interest is JPY 507.72m annually. YK Shintoku, with the divestment of 5 properties, would still generate a gross rental revenue of JPY 920.5m annually. Even after taking away 15% for expenses and fees, it would still have JPY 782.38m left. After deducting JPY 507.72m in interest expense (at the current 7%), YK Shintoku would still generate a nett income of JPY 274.66m! Very healthy. Personally, I do not see any reason why the CMBS loan could not be re-financed from this standpoint."
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