Saizen REIT: Visibility of DPU comes at a price
(Maintain HOLD, FV: S$0.195)
• Revenue from acquisitions kicking in. Saizen’s gross revenue and net property income increased by 9.7% and 13.6% respectively in FY13, largely supported by its acquisitions of seven properties. For the six-month ending 30 June 2013, Saizen declared a DPU of 0.63 cents, amounting to a full-year DPU of 1.29c. This is marginally higher than our projected FY13 DPU of 1.24c.
• Inching towards positive rental reversions. In FY13, overall rental reversions of new contracts were marginally lower by about 0.5%. This marks an improvement from rental reversions witnessed in FY12, during which rental reversions were lower by 2.1%. Given our cautiously optimistic outlook on the Japanese residential market, we maintain our assumption of flat rental reversions across Saizen’s portfolio.
• Acquisitions to be immediately yield-accretive. FY14 will witness the full-year contribution of Saizen’s recently-acquired properties. Sitting on a cash pile of JPY6bil, Saizen could tap on its cash balance to engage in immediately yield-accretive acquisitions. Moreover, Saizen has unencumbered properties valued at JPY2bil, further strengthening its financial clout. We are currently pencilling in JPY2.3bil of acquisitions at a 6% NPI yield.
• Visibility of DPU comes at a price. To provide its Unitholders with greater visibility on distributions, Saizen has entered into hedging transactions for its upcoming distributions. The distribution payment for the period ended 30 June has been hedged at an average rate of JPY75.12/S$ and the subsequent distribution is hedged at an average rate of JPY81.15/S$, which compares unfavorably with the current rate of JPY77.14/S$. This would inevitably weigh on Saizen’s FY14 DPU in S$ terms. While we expect Saizen’s 1H14 DPU to grow by 2.8% YoY in JPY terms, this will be offset by a 8.2% increase in the hedged rate. We currently project Saizen’s 1H14 DPU at 0.63c, that is 4.5% lower than 1H13 DPU.
• Unit consolidation proposed. 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.
• Maintain HOLD on FV $0.195. We rollover our estimates and lower our TP to S$0.195 on the back of a higher risk-free rate of 2.7%, implying a capital upside of only 6%. In our opinion, Saizen’s current yield level of 7%, which translates to approx. 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.
Publish date: 26/08/13