Saizen

Saizen (S$0.87): The Japanese residential properties REIT reported 2QFY15 results that are in line with expectations and 1HFY15 distributions of 3.10¢, flat h/h but down 4.6% y/y due to lower NPI in 1QFY15 and weaker JPY throughout 1HFY15.

DPU seems to have stabilized around 3.10-3.25¢ since 1HFY13, up from its 1.3¢ initial DPU in 2HFY10. Trailing 12m DPU yields 7.1% at current market price.

2QFY15 revenue and NPI were 1.25% and 0.5% lower y/y in JPY and 10.2% and 9.5% lower in SGD due to lower occupancy (90.0% vs 90.6%), marginally negative rental reversions (-0.3%) and loss of contribution from three divested properties.

NPI margins improved 0.5pp y/y in 2QFY15. Weaker JPY impacted bottom line on multiple fronts – lower asset manager’s fees, lower trustee’s fee and lower finance costs, but also lower finance income and other income (mostly FX translation losses).

Bottom line was also lifted by a one-off ¥18.0m gain on divestment of High Grace II in November 2014.

Volatility of JPY-SGD cross rates is a concern, as earnings are in JPY while distributions in SGD. Management has locked in the rates by forward contracts for expected FY15 distributions.

Interest rates of outstanding loans are 89% fixed, and the debt to maturity is between 7 to 30 years. Aggregate leverage at 36% gives debt headroom for expansion, management guides 40-45% for debt.

At $0.87, Saizen REIT trades at 21% discount to NAV of $1.10