Saizen REIT's TK operator Godo Kaisha (GK) Gyokou has, on 30 November 2012, entered into a sale and purchase agreement for the acquisition of Rise Shinoe (RSO) from an independent party for a cash consideration of JPY 285mil (S$4.2mil). The acquisition was completed on the same day. RSO is located in the Central Ward of Kumamoto City and is within 10'minutes walk from train and bus networks. RSO was built in June 2003 and comprises 34 residential units and 19 car parking lots. GK Gyokou will have full ownership of the entire building block of RSO and full title of the freehold land. RSO is currently generating annual revenue and net property income of approximately JPY 27.0 mil (S$0.4 mil) and JPY 19.3 mil (S$0.3 mil) respectively, which are equivalent to about 0.8% of both Saizen REIT's annual revenue and net property income in the financial year ended 30 June 2012. Currently, 33 out of 34 residential units and all
19 car parking lots are occupied.

The acquisition of RSO is a positive step for Saizen REIT. Noting that Saizen REIT is backed by a cash hoard of JPY4bn (S$59.2mil), we previously highlighted in our initiation report that Saizen has the firepower to engage in yield'accretive acquisitions and initiatives to grow inorganically will only translate into greater momentum in its top'line growth.

While the acquisition of RSO translates into an increased reliance on the city of Kumamoto ' the proportion of overall revenue generated from Kumamoto following the acquisition has increased from 17.7% to 18.3% ' we view this as a strategic move given RSO's accessibility to transport networks, young building age and high occupancy rate of 98% (by revenue). Evidently, these characteristics are complementary to the strengths of Saizen REIT's overall portfolio. The acquisition would lower the building age of Saizen REIT's overall portfolio as well as improve its portfolio's average occupancy rates. According to Saizen REIT's announcement, the net operating income yield of RSO is around 6.8%, and given that the acquisition is
expected to be financed entirely by cash, we believe the acquisition is on a yield'accretive basis. Saizen REIT's current dividend yield is at 7.3%.

We are currently placing our target price of S$0.212 for Saizen REIT (BUY, S$0.173) under review.

Source: AmFraser