Saizen Reit

Saizen Reit: 2QFY13 ahead of NRA’s expectations. Rental revenue remained relatively stable, growing 1.0% QoQ to JPY 940.4m while net property income (NPI) improved a mere 0.2% QoQ to JPY 667.2m largely due to a 19.3% QoQ rise in leasing and marketing expenses. Net operating income (NOI) rose strongly by 8.3% QoQ to JPY 488.7m, lifted largely by lower interest costs (-43.8% QoQ) ensuing from a translation gain of JPY 55.4m in 2QFY13 from SGD-denominated warrant proceeds following the yen depreciation. Excluding this gain, interest costs remained relatively stable. Despite the depreciating yen, a DPU of 0.66 cts has been declared for 1HFY13, +8.2% yoy, and +4.8% hoh. Saizen’s distribution is backed by a portfolio of residential assets in the regional cities of Japan, with stable and healthy average occupancy rate of 91.7% in 2QFY13 (1QFY13 : 91.7%: 2QFY12 : 91.0%) underpinned by urbanization trend and a leasing culture in Japan. Weakness in rental reversion continues to abate with overall rental reversion of new contracts in 2QFY13 dipping 0.3% (1QFY13 : -1.3%, 2QFY12 : -1.9%) from previous contracted rates. Mgt’s efforts to build-up banking relationship have paid off with a sizeable loan of JPY 10.38b ($137.3m) loan from Tokyo Star Bank at attractive terms that will lower Saizen’s effective interest rate and principal amortization, and in turn enhance distributable cash. NRA notes, an accommodating credit environment in Japan will continue to provide credit access for re-gearing to facilitate portfolio expansion, payment of loan amortization, strengthening of loan profile, and in turn, distribution enhancement. Backed by a relatively stable portfolio of assets valued at RNAV of $0.24/sh adj P/B of 0.79x is still low compared to PB of 0.99x of listed peers in Japan. Fwd yield at 7% is attractive. The house maintains Overweight with TP $0.214.