Monday, November 02, 2015

Saizen reit - the strange beast

This is a strange beast. You would have expected that because there's a stated acquisition price of $1.172, the price of Saizen reit would have traded closer to that price as arbitrators close in to profit from it. But the price jumped to 1.09 from 0.925/0.930 expectedly, then went to a high of 1.14, before lingering around the 1.10/1.12 range and closing at 1.10 for Monday.

If you buy in at 1.12 for example, you would easily have made 0.05 cts, about 4.5% off this arbitrade. This doesn't even include the dividend (from July to Dec 2015) that is going to be declared, which amounts to about 0.03, bringing the total reward to 0.08 cts, or 7.1%. And quite possibly, there should be another partial dividends from Jan 2016 to whatever date that Saizen assets are scheduled to be sold. So the important question is, if we choose to arbritrade, are we the smart ones or are we the suckers? Is there something they know that we don't?

I didn't know Saizen also represent the best, or forefront, in Japanese

Let's see what's the risk involved here. I think the primary risk is that the deal will not go through, and it's really not a done deal yet, though it's a fairly confirmed one since the management of Saizen had accepted an offer already. As such, the longer this drags, the higher the risk of the deal not going through. The deal is conditional upon a few things, but I think the most important ones are (1) approval by SGX and MAS and (2) the approval of unit holders. I don't think both are serious issues, especially the second point. The offer is ridiculously generous, considering that the stock is lingering about 0.8+, which is way below NAV. The unit holders should be jumping for joy at having such so many years of income all squeezed into one.

The secondary risk is how this is going to benefit unit holders. Technically, after Saizen sells off their assets, they will be loaded with cash and with no real business. It's stated that the manager will distribute the net proceeds from the deal to unit holders as soon as practicable through a special distribution. They will cease to be a reit and should likely choose to delist. Could it be possible that they will change their mind and choose to invest or acquire other business, change its name and still operate as a company? If that's the case, the unit holders of Saizen reit will not get the full 1.17 per share. Perhaps a fraction of it or none at all. There's a lot of uncertainties here, but this will be set out in a circular that will be mailed out to unit holders soon.

Let's see who are the possible sellers of Saizen?

1. Insiders who had gotten wind of the information and bought in way before it's announced, bringing up the price from 0.8+ to 0.9+ last week. They might want to sell out to seal their profits.

2. Investors who wanted income and wanted to take the money to invest in other reit before others come crowding in. A bird in the hand is better than two in the bushes. Something like that ;)

3. People who had borrowed money to get into reits might want to sell off. If you borrow at say 5% and get into this reit at 6%, you'll get a kind of leveraged yield or a dangerous kind of passive income stream. It's like picking pennies in front of steamrollers. They would want to sell off upon such news since they are using money they don't have.

4. Blur sotongs who don't know why the price went up so high and sold off to take profit.

Are there any more reasons? Wish me luck. I'm vested as of today.


SMK said...

good luck

Alick Yip said...

I have a question . The deal was agreed in terms of Japanese yen and the management translated it into Singapore dollar based on exchange rate of 86.33 on 28/10. Does it mean that unit holders have a risk of receiving ultimately less than S$1.172 per unit if exchange rate swings unfavourably ?

Budget Babe said...

I also wondering the same when I looked at the price today sia.

GMGH said...

Best post! I think this is what was on everybody's mind today! (Except the blur sotongs, haha!)

la papillion said...



la papillion said...

Hi yau hing Yip,

I think you're right. The exchange rate risk is there. I didn't even think of that lol

la papillion said...

Hi BB and GMGH,

Yeah man, that's what on everyone's mind, haha! Educational, that's for sure :)

Kevin said...

Surprise #1 : What you just mentioned in your blog post. Price didn't quite make sense to me too. *puzzled*

Surprise #2 : My rss feed sort of exploded today haha. Soooooooo many bloggers are holders of Saizen! Myself included - shsssh, small position only. I would have loved to just continue receiving dividends actually.

Alick Yip said...

I think it becomes a matter of hedge or not hedge on yen. For sure the yen amount agreed is a constant. S$ 1.172 per unit has no meaning at deal completion. Unit holders can receive more or receive less than that in terms of S$.

la papillion said...

Hi Kevin,

AK mentioned in his blog that 95% of the transaction is put in the company, with 5% put in another separate account for costs related to the transaction. So if we take 95% of 1.17, we get about 1.11, maybe that's the reason why the price is lingering around that region.

Haha, i'm not surprised a lot of us have saizen ;)

la papillion said...

Hi yau hing Yip,

True. That I agree. Don't think they will hedge as hedging needs money too haha

Alick Yip said...

If S$/ yen goes to 119.03, then what we will get in terms of S$ will be as if we sell at 0.85, the pre-news price. Of course, that is an extreme case. But still better pay attention to the policy announcements of BOJ. If they go for another round of QE, we die.

Anonymous said...

if saizen cease operations, then the managers out of job? other than golden parachute what other incentive they have to pay out the full nav

la papillion said...

Hi yau hing yip,

According to AK, they would have hedged it, so it seems the management knows what they are doing :) i think that's not the main risk. The main risk is still whether the deal will go through haha. Thanks for weighing in on this issue, much appreciated!

la papillion said...

Hi anon,

I think it's also their obligation to pay out to shareholders. Not so sure about the legal aspects of it, but I did read that they are liable for such things. Have to find out for sure. But I also don't think the management are evil in that sense. No history of them screwing the shareholders at all. Have to trust them to do what's right :) They probably also have shares themselves so if not for the greater good, at least it's for their own self interest to pay a good amount too.

K said...

I am one of the guys who bought it at IPO in 2007 and have lost 80% of my investment in the last 8 years. So much has happened since then am I just holding on to it. Fortunately, I only bought $2k worth back in 2007.

Holding on because it is not longer worthwhile for me to sell and pay the commission!

Anonymous said...

Me too invested through IPO and suffered huge lost.