Saizen REIT: Why did I buy and would I buy more?

There are so many ways to look at an event.  

Some might look at it positively and some might look at it negatively. 

Some might jump for joy and some might break out in cold sweat.

All of us have imperfect knowledge and what we think is reality very often is enough to push us into action. 

Of course, what we think is reality might not be reality and those who are eventually proven right might just have been lucky.






What is all this rambling leading to?

The recent weakness in Saizen REIT's unit price has been a source of concern or interest, depending on where we stand. 

Personally, I am not concerned. 

I am more interested. 

I also hope that I know Saizen REIT a bit better than most.

When I last blogged about Saizen REIT, its unit price had declined to 13.6c. 

That was already a 10% decline from its high of 15c a unit just a few weeks ago. 

In that blog post, I presented some numbers and asked that interested parties decide for themselves if 13.6c was a good enough entry price.

Well, I added to my long position yesterday at 12.8c to 13.1c a unit. 

Taking in the dilutive effect of the warrants, buying at these prices would give me distribution yields of 8.24% to 8.44%, all else remaining equal, which I believe to be rather attractive for freehold residential properties in Japan.

Some might even say that buying at these prices is similar to buying right after the triple disasters early last year when the REIT was sold down to 13c a unit. 

Is the REIT in a situation which is similar to last year's panic? 

Is a low of 12.7c per unit justified by worsening fundamentals? 

(This is really a rhetorical question since, often, there would be a mismatch between price and value.)





Well, the warrants outstanding, if fully exercised, would have a 12% dilutive effect on distribution yield, everything else remaining equal. 

However, the REIT is now without the problem it had with YK Shintoku back in early 2011. 

The REIT is currently in possession of a much stronger balance sheet and looks set to grow its DPU over time.

So, buying more of Saizen REIT now at 13c a unit has less uncertainty compared to buying at 13c in the aftermath of the triple disasters last year. 

Less uncertainty perhaps but what about value? 

Is buying at 13c now the same in value as buying at 13c back then?

The Palms Denenchofu, Tokyo. Acquired on 30 March 2012.

The NAV/unit now, taking into account the dilutive effect of the warrants would be 31c . 

This value, actually, has not changed since March 2011. 

Although it is good to know that we would still have the same value of asset backing each unit we purchase, we are really investing for income here and are not after discounted assets per se. 

What about its DPU?

With gearing, adjusted for warrants, reducing from 28.3% to 21%, the REIT has more resources to increase DPU through yield accretive purchases. 

Its DPU looks likely to be higher in future than not, all else remaining equal.

Would I buy more? 

I would continue to accumulate units of Saizen REIT next week if it should trade at 13c per unit or lower.




Related post:
Saizen REIT: To buy or not to buy.

Republished in NextInsight as:
Saizen REIT: Buy more of the REIT or no?

Saizen REIT: To buy or not to buy?

Regular readers would know my whole story with Saizen REIT. I remain invested in the REIT for various reasons which I believe are still valid.

This blog post is to answer a question which I have received from readers, friends and family alike. Is it a good time to buy more units of Saizen REIT?

This is a question which I would avoid giving a direct answer to. There is a great deal of subjectivity.

However, I would present some numbers here and you decide.

The annualised DPU is some 1.22c based on the last payout. At 13.6c a unit, the distribution yield is some 8.97%. Sounds good?

However, bearing in mind that its warrants will expire on the 1st of next month, I expect the warrants to be fully exercised within these few days. The exercise price is 9c. This would increase the units in issue by some 13%.

So, everything being equal, it would be reasonable to expect the DPU and distribution yield to reduce somewhat. Revised DPU is about 1.08c which would give us a distribution yield of 7.94% based on 13.6c a unit. Still sounds good?

I would also like to throw in the possibility of the JPY weakening further. The lowest the JPY has been against the S$, I remember, was S$12.50 to JPY1,000. That was a few years ago. It is currently about S$15.80 to JPY1,000. This is already weaker than late last year when it was more than S$16.00 to JPY1,000. Assuming that the JPY weakens another 20% from current levels, I expect the DPU to be 0.864c which would give us a distribution yield of 6.35%. Still good enough?

Of course, the weakening of the JPY is very unlikely to happen overnight in such a large magnitude. Neither is this a guaranteed scenario although it is highly probable with the Japanese government keen on weakening its currency.

What I have done so far is to assume the worst case scenario, barring more natural disasters and an attack by Godzilla. What I have not done yet is to take into consideration what the management might do to bump up DPU in JPY terms.

With the warrants exercised, the gearing of Saizen REIT would drop to the low 20+%. The REIT would probably continue looking for yield accretive purchases. Gearing is expected to hit the optimum 40% in such an instance. It is estimated that DPU could increase some 30% then. Promising, isn't it? Remember that this remains guesswork on our part, however.

I have mentioned this before but it pays to be reminded also that Saizen REIT's loans are amortising in nature. This means that its debt burden would reduce in time. In fact, I made the observation before that if the REIT's loans were not amortising in nature, its DPU would be some 50% higher than it is now.

Now, you decide if Saizen REIT is a buy for you at 13.6c a unit.

Related post:
Saizen REIT: Acquisitions to increase DPU.

See Saizen REIT's May 2012 presentation: here.

AIMS AMP Capital Industrial REIT: Scrip Dividend.

I have yet to participate in any distribution reinvestment plans. I like to buy more units or shares at prices I deem fair or undervalued. Now, this is probably a subjective exercise but I like the fact that I have control over the purchase prices.

When AIMS AMP Capital Industrial REIT announced that it would be offering a distribution reinvestment plan in April, I said that I would not be taking up the offer for two reasons:

1. I am investing for regular income and would like to have the quarterly distribution in cash.

2. I was not keen on increasing my exposure to the REIT at the prices then.

The REIT's unit price has taken a dive and the selling momentum could bring it closer to $1.00 a unit in time.

Those who accepted the distribution reinvestment plan would be getting new units issued at $1.1622 per unit which is closer to historical highs.

They would, of course, be saving on brokerage and other fees but I would rather buy more units from Mr. Market. Good luck to all of us.

Related post:
AIMS AMP Capital Industrial REIT: 4Q FY2012.