Saizen REIT: Deeply undervalued but is it a BUY for you?

Regular readers know that I have been invested in Saizen REIT for a long time. Some might even be able to write a script for a K-drama based on my experience with the REIT. Anyway, if you are interested in the history, just use the search function found in the top right area of this blog. I shan't bore you.

I mentioned Saizen REIT in the last "Evening with AK and friends" session and went on to highlight why it is one of my top 3 investments in REITs. I think that episode might have interested quite a few members of the audience as I received not one, not two but three emails asking me whether the REIT is priced fairly now. I must say that the emails weren't phrased exactly like this but they were close enough.

Taken on my last trip to Japan. Love the chocolates. Cheap too.

I will say that we must question, as always, our motivation for thinking of investing in Saizen REIT. Is it for income or capital gain?

For someone who is thinking of capital gain, the fact that Saizen REIT is trading at a huge discount to valuation might be the reason for his interest. At 86c a unit, it is trading at more than 20% discount to its NAV/unit of about $1.10. This is despite the continual fall in the JPY against the S$. Even at its high of 98c touched almost a year ago, it would still have been undervalued based on the weaker JPY today.

The first question we have to ask, of course, is whether the NAV is realistic. The best way to ascertain this is to see what price Mr. Market is willing to pay for the REIT's properties. In September last year, I said that the REIT sold two properties at premiums of 19% and 12.8% above book value. That told me that the REIT's NAV was conservative. In the REIT's February 2015 presentation, they reported that another property was sold at 16% above valuation.

There is some deep value in Saizen REIT's portfolio of freehold residential properties in Japan, I believe. However, whether the value could be unlocked and returned to unit holders is much harder to say. Could we see an acquisition by a residential J-REIT? I know that a substantial shareholder, Argyle Street Management (ASM) was pressing for something to this effect.

So, anyone who is buying into Saizen REIT, hoping for value to be unlocked, will have to be patient and also remember that it might or might not happen. While waiting, Saizen REIT offers about 6c in DPU per year. Based on 86c a unit, that is a distribution yield of about 7%.

For someone who is thinking of investing in Saizen REIT for income, it is important to bear in mind that income is generated in JPY by the REIT's assets but converted to S$ for distribution. There is always risk in foreign exchange rates. What do I think?

Gingko tree. So many of them in Japan.

The JPY has fallen a lot in the last 2 years against the S$. It is my opinion that any further fall is likely to be mild as:

1. The S$ is also weakening because the M.A.S. is mindful that Singapore must remain competitive and with the dramatic fall in the price of crude oil, Singapore's economy has become mildly deflationary of late.

2. The Japanese government wouldn't want to cause hardship for the Japanese people which any greater fall in the value of the JPY might bring. Already, the people are grappling with much higher inflation in prices of imported goods.

Having said this, for the income investor, what is very important to note is that Saizen REIT's loans are amortising in nature. I have mentioned this many times in the past when I was more active in blogging about the REIT. This means that the principle sums shrink over time as they are paid down. Amongst S-REITs, Saizen REIT is probably the only one that has this feature.

Also, amongst S-REITs, Saizen REIT is probably the only one with very long term loans with many maturing in the 2030s and 2040s. Long term loans actually make sense for REITs because property investments are, logically, long term commitments.

Anyway, the point is that because the loans are amortising in nature, Saizen REIT cannot distribute all its income to unitholders. Some of it goes to amortising the loans. However, because Saizen REIT amassed quite a bit of cash from many of its unit holders who exercised their warrants, they are able to use that money to amortise the loans, distributing income as if the loans were non-amortising. One day, this money will run out. Then what?

Then, everything remaining equal, we might see the DPU reduce by two fifths. So, distribution yield might become 4% then. This is something investors in Saizen REIT at the current price must be aware of and be comfortable with.

I estimated before that it would be many years down the road before it happens but when it does happen, the REIT would be even stronger in its balance sheet as its debt burden would have reduced significantly. I like this very much as it would give the REIT more debt headroom to acquire more properties which would mean a higher DPU. In other words, the REIT would be able to grow without having to raise funds from its unit holders.

There are many things which I cannot foresee happening or not happening. Could Abenomics breathe life into Japan's economy in a sustainable manner? Would demand for housing improve, leading to higher occupancy and asking rents? Would the JPY sink much lower?  These are some questions I do not have definite answers to.

However, there are some things that I do know and those are the things that inform my decision to be invested in Saizen REIT, those are the things that tell me Saizen REIT matches my motivation as an income investor. If there should be an unlocking of value sometime in the next few years, it would be a bonus for me. In the meantime, I am quite happy to be paid regularly.

Related posts:
1. Saizen REIT: Sell the entire portfolio?
2. Saizen REIT: Is the dividend sustainable?
3. Saizen REIT: Why did I buy? Would I buy more?

Saizen REIT: Undervalued and possibly more so.

On 23 March, I explained why investing in Saizen REIT at 88c a unit could be more palatable for some than investing in an apartment in Japan. Two months on, Saizen REIT is trading at a high of 93.5c a unit. It seems that Mr. Market's sentiments towards the REIT have turned positive. Sentiments? Yes, price movements are probably the result of sentiments. The value of the REIT has not changed.

A possible catalyst in the upward movement of the REIT's unit price is the announcement on options to enhance value for unit holders and this is going to happen sometime in the first half of June which is next month. My expectation is for a return of capital to happen. How much capital will be returned to unit holders, however, is harder to say.

A return of capital is going to have trade offs, not only in terms of future DPU for the REIT's unit holders but also in terms of the REIT's gearing level which will most definitely rise by a few percentage points although it is unlikely to go beyond 40%. This could be mitigated by the gradually rising prices of residential real estate in Japan which could mean a revaluation of Saizen REIT's properties is on the horizon.

When it comes to valuation, there is always a question as to whether valuations are realistic. After all, if valuations had been artificially elevated which is a form of financial engineering, then, things could go bad during crunch time. So, it is prudent to ask if Saizen REIT's properties' valuations are realistic too.

Actually, I believe that Saizen REIT's properties' valuations could be too low now.

During the global financial crisis when the REIT suffered from the CMBS' stampede for the exit, its properties were being sold very close to valuations in order to repay the CMBS for YK Shintoku (one of the REIT's many portfolios of properties) which suggested that the properties were valued realistically. More recently, however, on 19 May 2014, Saizen REIT announced the sale of one of its properties for JPY60 million. The property in question was valued in June 2013 at JPY50.4 million. This means that the property was sold at a 19% premium to valuation!

Now, imagine if the REIT's portfolio of properties were to undergo a revaluation of similar proportion. Even after a return of capital, the REIT's NAV per unit could be much higher than what it is today. This would mean that the REIT could become even more undervalued, everything else remaining equal.

For many people, the question might be whether it is a good time to buy into Saizen REIT. Honestly, I do not have an answer to this although those who did buy at 88c a unit when I last blogged about the REIT could be smiling now. Mr. Market could enter a bout of euphoria if there should be a return of capital to unit holders which exceed expectations. This could push unit price closer to current day NAV which is about $1.17 per unit. Whether it would happen or not is in the realm of speculation.

What I do know is the current value of the REIT and that at 93.5c a unit, it is still undervalued. There is also a probability that it could become even more undervalued in future.

I also know that the REIT's debts are amortising in nature and that it is reducing the total debt by a few percentage points every year.

I know that the REIT's debts are in JPY terms and this provides a natural hedge as its properties are all in Japan and valued in JPY.

I know that it has a robust interest cover ratio (i.e. NPI divided by interest expense) of 6x.

As an investment for income, Saizen REIT is likely to continue to be a consistent performer and as Abenomics gain traction, there could be positive surprises as valuations climb. Logically, we could also see rental income improving in due course.

Saizen REIT was one of my top 5 investments in S-REITs. Having reduced my exposure to LMIR and Sabana REIT, Saizen REIT is now one of my top 3 investments in S-REITs, together with AIMS AMP Capital Industrial REIT and First REIT.

Saizen REIT could turn out to be a very rewarding investment for me this year.

See Saizen REIT's presentation in May: here.
See recent announcement on divestment: here.

Related posts:
1. Apartments with rental yields of 4.95% to 7.3%.
2. Is the half yearly DPU of 3.25c sustainable?
3. Saizen REIT: Special dividend?

Saizen REIT: Net offer price of $1.172 per unit by Lone Star.

The news is out.

Purchaser is Triangle TMK which is a Japanese affiliate of Lone Star Real Estate Fund IV and Lone Star Funds. The Purchase Consideration is at a 3.4% premium to the appraised value of the Properties.

 

The Purchase Consideration is estimated to translate into an implied net offer price of S$1.172 per unit of Saizen REIT (“Unit”), or a slight premium to Saizen REIT’s adjusted net asset value (“NAV”) per Unit.

The Proposed Transaction is conditional upon, among others, approval from Unitholders at an extraordinary general meeting of Saizen REIT to be convened and is expected to be completed in the first quarter of 2016 and no later than 31 March 2016 or such other date as the parties may agree in writing.

 
See press release: here.




So, new shareholders who bought into Saizen REIT even at 92c or 93c a unit in the days before the trading halt yesterday would be in for a nice windfall too.

To be quite honest, I am pleasantly surprised because I was expecting an offer that is, perhaps, at a 5% or even 10% discount to NAV which means a price of $1.03 to $1.08 per unit.

I was being realistic because it is much more difficult to find a buyer who is able to buy the entire portfolio of more than 130 buildings at one go compared to selling one building at a time.

$1.17 a unit exceeds my expectation and I am in favour of the sale although I will miss having Saizen REIT in my portfolio. I have had it for so long and it has been good to me as a stable and meaningful income generator in the last few years.

Now, I notice some who are saying that Saizen REIT provides a good lesson on investing in REITs and that if we buy a REIT at a big discount to NAV, we are safe. This is not 100% accurate and, in fact, it could be a dangerous belief.

I did not buy into Saizen REIT just because it was trading at a huge discount to NAV but because the NAV was also realistic. This was just one of the many considerations I had. There were also other reasons which made Saizen REIT a great investment to me.





Interested readers might want to read my past blog posts on Saizen REIT and why I was so convinced that Saizen REIT was a fantastic investment. (Use the "Search ASSI" feature at the top of my blog.)

Now, with Saizen REIT set to be delisted, I will see my cash position swell as it is one of my 3 largest investments in S-REITs and accounts for slightly more than 20% of my passive income from S-REITs.

For me, it will be like getting 17 income distributions all at once which is better than getting them over a period of 8.5 years, for sure.

A dollar today is better than a dollar sometime in the future.





This is a good outcome and I must not be sentimental.

Congratulations to all my fellow shareholders who got in at the right time and held on till today.

Huat ah!

(Read comment made on 2 Nov 15 at 6.09 pm below.)

Related posts:
1. Possible delisting of Saizen REIT.
2. Saizen REIT: Deeply undervalued.
3. Saizen REIT: Sell the entire portfolio?

Saizen REIT: Still a good investment for income?

Saizen REIT is now one of my top 3 investments in S-REITs and in a recent talk, I said the same thing. I also explained why I invested in Saizen REIT and why I quadrupled my long position in the REIT when I did.

Anyway, Saizen REIT's latest presentation is now available for viewing and I have attached the link: here.

DPU: 3.1c.

While I believe that the weakness in the Japanese Yen is likely to continue for many more years, residential properties' occupancy and rental rates should start to pick up in the next couple of years if Abenomics gain even more traction.

Having said this, remember that Saizen REIT is distributing income in an amount that pretends that its loans are non-amortising in nature. What is the effect? Amortisation of loans cost 1.46c per unit which means if the REIT did not have the cash resources to pay for this and if the money were taken from income generated by the REIT's portfolio of properties, only 1.64c would have been available for distribution to unit holders this time.

See related post #1 at the end of this blog post.

NAV/unit: $1.22

In JPY terms, the valuation of properties in the REIT's portfolio seems to be rising and in one of my earlier blog posts, I shared that Saizen REIT's real estate assets could be more undervalued than we think.

See related post #2 at the end of this blog post.

Gearing: 37%.

Although Saizen REIT published their net gearing as 31%, I will take 37% for a more conservative guidance. I also want to remind myself that Saizen REIT uses its cash resources to offset amortisation cost. See earlier point on DPU above.

Weighted Average Loan Interest Rate: Less than 3%.

Debt profile: Earliest loan maturity in 2020.

Unlike most other S-REITs, Saizen REIT is able to secure loans with relatively long tenures which makes a lot of sense since real estate investment is essentially a long term commitment. The inability to refinance when loans mature was a reason why many S-REITs were caught in a bind during the GFC only a few years ago. Some of Saizen REIT's loans actually only mature in years falling in between 2031 to 2044.

Occupancy: 91%

There is still room to bump up income by getting more tenants but this would really depend on whether the Japanese economy improves meaningfully but with plans to allow more foreigners to join the economy, things could start looking up.

See related posts #3 and #4 to hear me talk to myself a bit more about the REIT. For me, Saizen REIT is still a great investment for income.

Related posts:
1. Saizen REIT: Is the DPU sustainable?
2. Undervalued and possibly more so.
3. Rewarding patient investors.
4. Saizen REIT: A foreign talent.

Saizen REIT: A foreign talent!

This blog post is written in reply to a comment by a reader with regards to Saizen REIT. Read the reader's comment: here.

My reply:

Hi Simple Boy,

The way in which you annualised the income distribution is valid. It is always an estimate anyway and discussing whether it is accurate or not won't be very meaningful, I feel. So, I shan't be crunching numbers here.

As for comparing Saizen REIT's distribution yield against those of other S-REITs', I think it could be doing Saizen REIT an injustice to do so.

Firstly, different property types will command different yields and certain property types command higher yields. Saizen REIT owns residential real estate which, usually, are lower yielding. However, the demand for rental properties is relatively inelastic, especially in a country like Japan where the majority rent their homes. We don't have another REIT in Singapore that holds residential real estate for us to do a comparison against Saizen REIT.

Secondly, in the world of S-REITs, Saizen REIT is a rather strange animal because it doesn't have any properties in Singapore. All of its properties are in Japan. So, should we really call it an S-REIT or should we call it a J-REIT? I am inclined to think of it as a J-REIT that has a PR status in the world of S-REITs. Foreign talent, you know?

So, if we want to compare apples with apples and if we take a look at J-REITs, we would discover that it is rare to find those with distribution yields of 6% or higher.

Of course, to really compare apples with apples, we should compare Saizen REIT with J-REITs which hold residential real estate. There are quite a few J-REITs holding residential real estate but here are some numbers from 3 such J-REITs with the second last column representing the annualised distribution yields.



Click to enlarge.
Source: Tokyo Stock Exchange.

So, in the world of residential properties J-REITs, Saizen REIT would look very attractive now.

Could we see Saizen REIT's distribution yield declining to become closer to what J-REITs are offering now? I don't know. I need a working crystal ball to answer this question. My bowling ball struggles but cannot make it. However, I do know that distribution yield will decline if DPU falls or if unit price increases. 

So, what should we as income investors do? We look at how the DPU could fall, given all the information which we have. When we do this, we are actually assessing the level of sustainability of the REIT's income. There is no point in wondering how high the price could go or is there?

Of course, if someone would prefer to invest in S-REITs with higher distribution yields compared to Saizen REIT, there isn't anything wrong with that. However, making investment decisions based purely on distribution yields would be somewhat myopic.

Related post:
Saizen REIT: Rewarding patient investors.

Saizen REIT: A brief break through.

Saizen REIT had a high volume, white candle day. Could it be that Mr. Market is more than warming up to this once upon a time unloved REIT? It certainly looks that way.

Draw some Fibo lines and we see why 21c was a strong resistance today. With volume as high as today's, however, it would be natural for any chartist to wonder if there could be a follow through in the next session.

Of course, the very long upper wick on the candle suggests the presence of very strong selling pressure as unit price tried to push higher. Look at the CMF and we see a lower high and a lower low which suggest to me that money was flowing out of the counter as price pushed higher. This could limit upside in the short term.

Fundamentally, the NAV/unit of Saizen REIT as well as its DPU in S$ terms could reduce somewhat due to the weaker JPY. Against the S$, the JPY has weakened some 20% in the last one year. So, it would not be wrong to expect lower distribution yields, all else remaining equal.

However, Saizen REIT has been on an acquisition path and this would mitigate any reduction in NAV/unit as well as DPU in S$ terms. Indeed, unit holders would have been very pleased when a higher half yearly DPU of 0.66c was paid out recently. That was a bit higher than the DPU six months earlier.

On 31 December 2012, the REIT's NAV/unit was JPY 19.21.  Based on the exchange rate of S$13.30 to JPY 1,000 today, NAV/unit works out to be S$0.255. So, at 20c a unit, Saizen REIT is still trading at a discount to NAV. Almost 22%, actually.

If units of Saizen REIT should trade at S$0.25, with an annualised DPU of 1.32c, we are looking at a distribution yield of 5.28%. For a portfolio of freehold residential properties in Japan which has seen a consistent occupancy rate of above 90%, is this good enough for Mr. Market?

There are really no comparable REITs listed in Singapore and we have to look at J-REITs to get a clue as to why Saizen REIT could look very attractive even at today's price. J-REITs' average distribution yield is just slightly above 4% now. So, at 20c a unit and with an annualised DPU of 1.32c, the 6.6% distribution yield from Saizen REIT looks extremely attractive.

With an aggressive Bank of Japan bent on their own brand of quantitative easing (QE), we could see the Land of the Rising Sun experiencing rising prices again. So, we could see Saizen REIT's portfolio of properties being valued higher in JPY terms over time. This could bump up NAV/unit in S$ terms.

However, if we look at the experience of the USA, it could take years and more than one QE before we see positive results. So, any optimism in the short term should be tempered but the longer term picture is very promising.

If Mr. Market is ready to accept a lower distribution yield of 5.5% from the REIT and 5.5% is still much higher than comparable J-REITs' distribution yields, then, we could see unit price trading higher at 24c in time to come, everything else remaining equal.

So, is Saizen REIT still undervalued now? Yes, even now, I believe that it is.

Technically, however, selling pressure was very strong as unit price tried to push past 21c. CMF shows an increase in the outflow of money from the REIT as unit price moved higher today. So, if you took some gains off the table today, I think it was a great idea. Just make sure to get back in at supports if given a chance.

Related posts:
1. Saizen REIT: Still a buy?
2. Saizen REIT: DPU 0.66c.

Saizen REIT: Sell the entire portfolio or find a larger partner.

One of my more successful investments in the last few years is probably in Saizen REIT and regular readers who have followed the story would be quite familiar with it. So, I shan't repeat the narrative.

In the past issue of The EDGE, it was reported that a major investor in Saizen REIT is unhappy with the lack of growth in the REIT. Well, actually, the fact that Argyle Street Management (ASM) is unhappy isn't anything new and I blogged about my view in November last year.

Now, the CIO of ASM is suggesting that "we either sell the entire portfolio or find a much larger partner." There is quite a bit of frustration but it is probably justifiable.

This is because Saizen REIT's NAV/unit is $1.22 and it is trading at around 90c a unit. If all the REIT's properties were to be sold at valuation, shareholders would receive $1.22 a unit or a 35% gain from the current market price. So, if there should be a willing buyer, selling the entire portfolio at valuation makes sense.

In fact, I am inclined to believe that Saizen REIT's properties are worth much more since they managed to sell a property in May at 19% above book value and another one in August at 12.8% above book value. This suggests that the book values of the REIT's properties are rather conservative.

The REIT's NAV could be about $1.35 to $1.40 per unit. This means a potential capital gain of 50% to 55.5%. It is, however, I believe, harder to find a buyer for the entire portfolio at such high prices.

Well, whether or not the current managers of Saizen REIT are replaced, for me, is less important than how my investment in the REIT could be impacted.

I have examined before the sustainability of the current day DPU and, if I remember correctly, I said it should be sustainable for the next 8 years. Could we see the Japanese economy and currency strengthen in the next 8 years? I don't know but I do know that there is enough resources to maintain the current level of distributions for a few more years. Beyond that, I expect DPU to reduce, everything else remaining equal.

A DPU of 6.3c translates to a distribution yield of about 7% at a unit price of 90c. If I should be paid $1.22 per unit for my investment in the REIT, I would liken it to collecting many years of income distributions in advance which is not a bad thing. A bird in hand is worth two in the bushes, as the saying goes.

So, am I going to increase my exposure to the REIT? No. Why? Isn't it a good investment for income? I believe it is but my exposure to the REIT is already quite large and I estimate it to be some 12% or 13% of my entire portfolio. My only other two investments which are bigger are AIMS AMP Capital Industrial REIT and First REIT. I don't see any need to increase the weighting of any of these REITs in my portfolio.

What if I did not have any exposure? Well, if I should be happy being paid a 7% distribution yield buying into rather undervalued freehold Japanese residential real estate, I might initiate a long position. Then, all that is left for me to do is to wait.

Related posts:
1. Saizen REIT: Good investment for income?
2. Saizen REIT: Undervalued.
3. Saizen REIT: Is the dividend sustainable?

2014 full year income from S-REITs.

For my investments in S-REITs, the biggest thing that happened this year was the reduction in exposure to Sabana REIT.

Some might remember that I first invested in Sabana REIT in March 2011 at 92.5c a unit. As its unit price declined to under 90c, I bought more. It became one of my top two investments in S-REITs for about three years, delivering a distribution yield on cost of about 10% during that time.

I actually started reducing my investment in Sabana REIT in late 2013 and not this year as I started to build a larger position in Croesus Retail Trust then. I chose to reduce my investment in Sabana REIT instead of AIMS AMP Capital Industrial REIT because I felt that the latter was doing a better job of building value for unit holders as an industrial properties S-REIT.

After the major divestment of Sabana REIT early this year, my remaining exposure to the REIT is barely 10% of what it was at its peak. Now, my top three investments in S-REITs are:

1. AIMS AMP Capital Industrial REIT.
2. First REIT.
3. Saizen REIT.

AIMS AMP Capital Industrial REIT's Mr. George Wang constantly adds to his investment in the REIT, aligning his interests with those of minority shareholders'. The management have shown themselves to be capable in creating value for unit holders in their exploitation of existing properties' plot ratios. They have also improved the financial resilience of the REIT by securing other forms of funding and in strengthening its debt maturity profile.

This year, I took part in AIMS AMP Capital Industrial REIT's rights issue and sold the rights units for a profit some time later. Although the REIT has been doing well, it is my single largest investment in the S-REITs universe and I want to keep my exposure to a level I am more comfortable with.

In January this year, I wrote a blog titled "A simple way to a double digit yielding portfolio". It was an account of my journey as an investor with First REIT, more or less. First REIT is another example of how a REIT, if properly managed, could be a very good investment for both income and growth. It is also a REIT in which the CEO constantly puts more of his own money in.

With its DPU growing while its balance sheet stays relatively strong, my blog post titled "First REIT: This one is for keeps." in March 2010 could turn out to be quite prophetic. As long as the management continues to be prudent and as long as there is stability and a gradual pace of growing prosperity in the economies of Singapore and Indonesia, the REIT should continue to deliver good results.

Saizen REIT, my third largest investment in the S-REIT universe, has been a very rewarding investment so far. It seems to be a more complicated investment in more ways than one and as an income investor, the fact that it receives income in JPY and pays its investors in S$ is something we must consider.

The weakness in the JPY is definitely a concern. Although the downside can be hedged, it is not cheap to do so. So, realistically, I would expect some decline in future income distributions in S$ terms as the BOJ continues to expand money supply. Whether Prime Minister Abe's QQE will work or not is still a matter of contention but a weaker JPY is the new reality.

However, Saizen REIT remains a strong value proposition and the fact that a substantial shareholder has been fighting to unlock its value is proof of this. I have said time and time again that patience will be rewarded for investors of Saizen REIT's. I am sure it is beginning to sound rather tired but I will say it again. Patience will be rewarded.

For both First REIT and Saizen REIT, I have not done anything to add or reduce exposure this year. I have simply sat back, relaxed and collected income from them.

So, what did I buy this year in the S-REITs universe? I nibbled at Soilbuild Business Space Trust in August. It was a nibble because I thought it was a fair price but not undervalued. I rather like the numbers and the management seem to be competent. For those who have not read my blog post on the REIT and why I decided to buy some, please see related post no. 6.

I also have investments in the following S-REITs:

A. Keppel REIT
B. Frasers Commercial Trust
C. Lippo Malls Retail Trust
D. Cambridge Industrial Trust
E. Suntec REIT
F. Cache Logistics Trust

These are largely legacy positions or what are left after I reduced my investments in these REITs in a big way. My investment in Sabana REIT should rightly join their ranks.

With income from Sabana REIT significantly reduced this year and the fact that it was one of my largest investments in S-REITs, 2014 full year income from S-REITs has reduced drastically.

Total income received from S-REITs in 2014:
S$ 88,476.22

Although this gives me some $7,373.02 of income per month, this is a more than 25% reduction from what was received in 2013 last year. This is a significant reduction, no matter how we slice it.

Some might wonder what is AK the income investor to do? Well, I have been increasing my exposure to some other investments to make up for the shortfall in income. I might have to talk to myself in another blog post regarding these investments.

Related posts:
1. 2013 full year income from S-REITs.
2. Added Croesus Retail Trust and reduced Sabana REIT.
3. AIMS AMP Capital Industrial REIT: 7 for 40.
4. A simple way to a double digit yielding portfolio.
5. Saizen REIT: Rewarding patient investors.
6. Soilbuild REIT: A nibble.

Saizen REIT: Is the half yearly DPU of 3.25c sustainable?

Saizen REIT has announced a slightly higher DPU of 3.25c compared to 6 months ago. Post consolidation, the DPU 6 months ago would be equivalent to 3.15c. This means DPU has gone up by some 3.17%. Income will be distributed to unit holders on 21 March 2014.

Unit price of Saizen REIT's closed at 92.5c. So, annualising 3.25c means a distribution yield of 7.03% per annum. This yield is quite attractive for freehold residential buildings in Japan.

I really do not have any major concerns with holding on to Saizen REIT as an investment for income. I believe it is a stable income generator in S$ terms even with the JPY at historic lows. After all, the REIT hedged the exchange rate risk at S$12.32 to JPY1,000. This is pretty darn low.

The REIT will be hedging exchange rate risk again for the next six months but will employ a range this time. S$12.20 to S$13.12 : JPY1,000. Everything else remaining equal, it means that we could see DPU 6 months later either declining by 1% or rising by as much as 6.5% in S$ terms. Sounds good? I think so.

The rest of the numbers, Saizen REIT has prepared very good presentation slides as usual and I am sure they are self explanatory. I am more interested in how more recent developments could impact DPU in future.

Remember that in November last year, Argyle Street Management, which holds 8.9% of the REIT asked for cash which the REIT was holding to be returned to unit holders? That amounted to JPY4.86 billion or more than S$60 million in cash at the time.

Now, if this were to happen, it would affect not just the NAV of the REIT but also its DPU. This is because Saizen REIT's loans are amortising in nature and why this is actually a good thing over the long run has been mentioned in this blog a few times before.

Amortisation or principal repayment should be from income generated by the REIT's properties. This is only logical. The REIT, however, uses its cash resources to effect this principal repayment which enables it to distribute more of the income generated by its properties to unit holders. Out of the half year DPU of 3.25c, this measure accounted for 1.19c or some 36.6% of DPU. This is significant.

Annual amortisation approximates JPY 633 million. So, this means that with the cash the REIT has in hand, it could continue to use its cash resources to effect principal repayments for almost 8 years which would help to maintain a higher DPU.

However, if the cash were to be returned to unit holders instead, then, we should expect DPU to decline to approximately 2c every 6 months or 4c a year. I would not expect unit price to stay at 90c then either. I would expect unit price to fall to the region of 70c a unit or a bit lesser and with a DPU of 4c, we would then be looking at a distribution yield of some 5.71%.


A distribution yield of 5.71% is still pretty good for the kind of assets the REIT owns, especially when the loans are amortising in nature. Of course, one has to remember that in such a scenario, existing unit holders would most probably have had received some 20c per unit in "special dividend" too. This is not bad at all especially if we got in at the lows.

Blogging about the results in this way is really to remind myself of what is the underlying reality in Saizen REIT's DPU and to prepare myself for change which could be on the way.

See slides: here.

Related posts:
1. Saizen REIT: DPU of 0.63c.
2. Saizen REIT: A special dividend?

Saizen REIT: AGM on 19 Oct 10.

I managed to take leave from work to attend Saizen REIT's AGM with a friend today. The AGM started on time and there were few surprises for me as I have been tracking this REIT for about a year now. Nonetheless, I picked up some interesting points which might not be apparent from the presentation slides.

The management took pains to impress upon unitholders that even if YK Shintoku were to suffer a foreclosure, the rest of Saizen REIT would not be affected. The DPU of 0.26c for the months of May and June 2010 did not have any contribution from YK Shintoku. We could expect this DPU to be sustainable. So, even if YK Shintoku's loan remains unresolved, we could expect a DPU of 0.26c x 6 = 1.56c per annum, ceteris paribus.  This is a yield of almost 10% based on a unit price of 16c.  However, I would expect this to be diluted somewhat if all the warrants are exercised. A 7% yield could be more realistic then.  When we take into consideration that Saizen REIT owns freehold properties, this becomes quite attractive.

Depending on whether YK Shintoku's CMBS is refinanced and the size of its portfolio at the point in time if refinancing happens, yield would be adjusted upwards but the magnitude of such an adjustment would remain guesswork for now, at best.

The management's energy is now focused on the re-financing of YK Shintoku's CMBS. The main difficulty in getting the loan re-financed is the cautious stance of lenders. This explains why they are gradually divesting properties in YK Shintoku to lower the absolute quantum of the loan. This is a preferred alternative to having the portfolio foreclosed by the CMBS holders.

A smaller loan quantum would also make it more palatable to potential lenders, of course. In fact, Mr. Raymond Wong mentioned that a bank in Tokyo is willing to lend them more money provided that they resolve the YK Shintoku CMBS first. A chicken and egg problem, it seems.

Mr. Wong further revealed that in the last two years or so, they met up with about 60 different banks and managed to refinance all but YK Shintoku 's CMBS. The absolute size of this CMBS remains a challenge although it has been reduced through divestment of properties over time from the original JPY 7.953 billion to the current JPY 5.9 billion. It was also said that YK Shintoku has a cash reserve of JPY 0.6 billion which would reduce the outstanding loan balance to JPY 5.3 billion.

The problem with CMBS is that it has to be fully repaid and there is no amortising feature. So, the challenge is now to find a lender willing to lend JPY 5.3 billion to refinance YK Shintoku's CMBS.

The management revealed that it collected $14.56 m from warrant proceeds as of 18 Oct. Potentially, it could receive another $30.18m if the rest of the warrants are exercised. If enough properties from YK Shintoku were divested to make the outstanding loan balance payable using warrant proceeds, we might not even need to refinance the loan. JPY 5.3 billion is (at today's rate of 1 JPY = 0.01575 SGD) equivalent to S$83.475m.  For such an option to work, it seems that Saizen REIT would have to divest another $40m worth of properties from YK Shintoku's portfolio.

Both Mr. Raymond Wong and Mr. Chang Sean Pey agreed that it is not the best time to sell properties in Japan. In fact, it is a time to buy properties in Japan (which could explain partially why GLP and MLT bought so many properties this year in the country). Unfortunately, the lack of willing lenders for YK Shintoku's refinancing bid leaves them little choice but to continue divesting properties until a time when it is no longer necessary. Like Mr. Wong said, it beats having the portfolio foreclosed.

The successful refinancing or discharging of YK Shintoku's CMBS would represent a bonus for unit holders since it would resume contribution to the REIT's distributable income. This is not, by any means, certain. Therefore, I would not buy Saizen REIT with this as the primary motivation. It is just a bonus that could very well materialise.

The management's tact to present the REIT as a safe income generating instrument was not lost on me. However, some unitholders were clearly not impressed and asked if there were plans to have greater coverage of Saizen REIT by brokerages and whether there would be further re-rating upwards by Moody's. It is a fact that Saizen REIT's units are trading at a huge discount to NAV and the yield is very high.  This was explained by Mr. Raymond Wong, quite candidly, because of the market's perception of the REIT which has remained unfavourable as well as the negative perception of the Japanese economy as a whole.

Having said this, understanding the need to have increased coverage for Saizen REIT, the management has met up with the largest retail brokerage in Singapore yesterday and will conduct a briefing for analysts today. Of course, positive coverage could give Saizen REIT's unit price a shot in the arm.  After all, it remains a strong value proposition.

Mr. Chang made a very good point that the depressed value of Japanese residential real estate is not because rental rates have plunged. Rental rates have remained relatively stable. It is because liquidity has dried up but this is slowly changing. The recent successful divestment of various properties in YK Shintoku shows that buyers are back and liquidity is returning. Things could only get better from here, in my opinion.

So, was there anything I did not like about the AGM? Resolutions 3 and 4: Allowing the manager to make or grant convertible instruments and to issue by way of placement at a discount of 10 to 20% of the unit price at the point in time. Although Mr. Raymond Wong assured unitholders that it is a formality and that they would not do any placements at such a steep discount to the current very depressed unit price, I voted against these resolutions.  I do not like share placements as they exclude small investors like me from taking part in the enlarged capital base.  I much prefer a rights issue.

In general, I enjoyed the AGM. Both Mr. Raymond Wong and Mr. Chang Sean Pey were polite and shared information freely. They answered questions candidly, acknowledging the difficult circumstances surrounding their efforts to refinance YK Shintoku's CMBS. Mr Arnold Ip, the Chairman, whom I have always imagined to be a Chinese gentleman but turned out to be Eurasian, said that they are now a lot more optimistic about the REIT and its future when, only a year ago, they were thinking of the worst case scenario.

After attending the AGM, I am more convinced than ever that Saizen REIT is a value proposition that is hard to ignore.  It is an income instrument that would continue to deliver a relatively high yield at the current price and the potential upside is more than any potential downside. I would continue to accumulate on weakness, if the opportunity presents itself.

AGM presentation slides here.

Related post:
Saizen REIT: Divestment of 3 properties.
Saizen REIT's properties: Would I buy?
Saizen REIT: Better than expected DPU.

Saizen REIT: March 2010 Presentation

Regular readers would know by now that I am accumulating units in Saizen REIT as it is a huge bargain.  I have likened it to buying a $2.9m condominium unit for $1.6m before.  That analogy still stands.  On 3 March 2010, Saizen REIT's manager, Japan Residential Assets Manager Limited, presented their latest results and I would like to share some numbers here with fellow unitholders and other interested parties.

The NAV per Unit is S$0.40.  However, some are worried that the portfolio of properties under YK Shintoku might be foreclosed.  In case of foreclusure, the NAV per Unit excluding YK Shintoku would be S$0.36.  On top of this, some are worried about the dilution that would take place once all the warrants are exercised.  In such an instance, the diluted NAV per Unit would be S$0.28.  The diluted NAV per Unit is based on 1,446,357,417 Units and warrant proceeds of S$44.7 million.  Please find the full details at:
Saizen REIT: March 2010 Presentation

Saizen REIT is on track to resuming income distribution to unitholders in mid 2010 and its gearing level would fall upon the the full repayment of its CMBS loan for YK Keizan in April next month. A re-rating upwards by credit agencies is highly probable.


Although Saizen REIT's remaining CMBS loan for YK Shintoku is still being negotiated, personally, I do not foresee foreclosure taking place. If the loan is still being serviced, why would the lender want to proceed with foreclosure, especially with the punitive (aka lucrative) interest rate of 7% imposed on the borrower, more than doubling from the 3% before? Having said this, it would be in the interest of all unitholders that Saizen REIT's manager secures re-financing at a more reasonable cost soon.

June 2009 data from CB Richard Ellis, Colliers International, show that the average rental yield in Japan is the highest for residential properties at 5.5 to 6.5% p.a. This is followed by industrial properties, retail properties and office properties. Such high yields have attracted the attention of institutional funds which are expected to snap up assets at bargain basement prices. It is when things look the bleakest that the most opportunities are to be found. According to one Japanese investment bank analyst, for example, “we’ve been approached recently by many pension funds that want to increase their exposure to real estate because they realize prices are going down. They are happy to buy early because their return target is very low, maybe 5 percent.”

Some people have asked me why not go buy some Japanese residential real estate? Well, obviously, I do not have deep pockets like the institutional funds. I won't be able to buy a single apartment in Japan, let alone a whole apartment block.
The way I see it, Saizen REIT's financial health has improved significantly and will continue to improve. With its units trading at such a deep discount to NAV, if I have the money, why bother buying the underlying assets? I would just buy the REIT. To make it more tantalising, Saizen REIT is likely to yield upwards of 10% p.a. when it resumes income distribution to unitholders from mid 2010.  This is much higher than the average of 5.5 to 6.5% yield for Japanese residential real estate as reported by CB Richard Ellis, Colliers International in their findings published in June 2009.

Some people I spoke to responded by saying they have missed the boat and lamented that they should have bought some units when it was 10c.  I would tell them that I started buying at 13c, not 10c, and I am still buying today.  Why? The fundamentals are still very compelling and the charts look good.

Related posts:
Passive income with high yields: Saizen REIT.
Buy Japanese real estate.
Saizen REIT: Long-term buy.
Saizen REIT: A symmetrical triangle?

Saizen REIT: DPU of 0.63c.

Despite a much weaker JPY, Saizen REIT has delivered a respectable income distribution in S$ terms, a DPU of 0.63c to be precise.

Saizen REIT's DPU in JPY terms has been improving steadily in recent years. In the last half a year, DPU in JPY terms has shown an improvement too but a much weaker JPY means that DPU took a hit in S$ terms.

Income in JPY terms climbed mainly due to new acquisitions. Of course, a buy back and cancellation of shares also helped.

As of 30 June 2013:

NAV/unit: 25c
Gearing: 38%
Interest cover ratio: 6.0x

To reduce the impact of a weakening JPY on income distributions in S$ terms, Saizen REIT's management entered into hedging transactions.

The rate for the 6 months period which ended on 30 June 2013 was JPY75.12 = S$1.00. The rate for the 6 months period ending 31 December 2013 is JPY 81.15 = S$1.00. It is going to be some 14% costlier to buy S$, it seems. So, if I read this correctly, we should see downward pressure on the next income distribution in S$ terms, everything else remaining equal.

Saizen REIT has refinanced and in so doing brought down its average interest rate as well as its rate of amortisation. Yes, regular readers will remember that Saizen REIT's loans are amortising in nature. It will also not see any loan maturing until four and a half years later in February 2018.

So, is reducing the rate of amortisation a good thing? Well, it will mean that the REIT will have more income from operation available for distribution. However, it is unlikely to mean a higher income distribution in JPY terms because the REIT is currently using its cash resources to offset amortisation in order to free up more income from operations for distribution to unit holders anyway. It will, however, mean that there is less strain on the REIT's current cash resources.

The management is also proposing to do a 5 to 1 unit consolidation. This is a bit of a déjà vu. I remember the time when AIMS AMP Capital Industrial REIT did a 5 to 1 unit consolidation too. Fundamentally, it really doesn't change anything.

Qualitatively, investing in Saizen REIT now is to invest in freehold Japanese residential properties at a discount to their valuations. If we believe that the Japanese economy will enjoy a revival as Abenomics gain traction, then, Saizen REIT could be a good proxy as the country frees itself from deflationary forces.

The REIT's numbers are good but the persistent weakness of the JPY as the BOJ stays the course with its own brand of QE is going to lower income distribution in S$ terms in the foreseeable future. A conservative forecast of 1.1c in annual DPU would mean a distribution yield of 5.8% assuming a unit price of 19c. Compared to J-REITs with residential properties in Japan, this is relatively high and although it is not particularly cheap at current prices, Saizen REIT is not overpriced.

See FY2013 presentation: here.

Related post:
Saizen REIT: DPU of 0.66c.

Saizen REIT: Still a buy?

There is no doubt that anyone who bought units of Saizen REIT about half a year ago when its warrants approached expiry would have done very well with some 45% capital gains (based on the current price of 18.8c per unit). We would also have collected a DPU of 0.63c which translates into a half year distribution yield of 4.85% if we had bought at 13c per unit.

I have been asked by quite a few people whether Saizen REIT is still a good buy. So, is it?

A street in Shinjuku at night.

With the JPY having declined by some 17% since the last time I looked at it, Saizen's NAV/unit is probably closer to 25c/unit now. The REIT is flushed with cash from the exercise of its warrants last year and its gearing level is relatively low.

The rapid decline in the value of the JPY is a bug bear for investors who are after regular income. All else being equal, DPU would decline in S$ terms and at the exchange rate today, a DPU of 1.05c per year is a fair estimate. At 18.8c per unit, it would mean a distribution yield of some 5.59%.

Saizen REIT has acquired more residential buildings and is likely to continue to do so with its much stronger balance sheet. The type of residential buildings in Japan that Saizen REIT invests in are mostly selling at below replacement cost. Translation: they are good value for money.

There is a definite growing interest in real estate in Japan. Private investors from Europe, USA and China have been active investors. So, Saizen REIT's portfolio could see its value increase over time as its buildings are revalued. This could cancel out the effect of a declining JPY as it pushes up the NAV of the REIT.

As for distribution income, I would expect the management of Saizen REIT to employ some form of hedging strategy to protect DPU in S$ terms. This is necessary as Mr. Abe, the new Japanese Prime Minister, is determined to cheapen the JPY and to herald in an inflation target of 2% per annum for the country.

Over time, I expect DPU in S$ terms to be relatively stable although it could take a hit from the declining JPY in the next payout in March. In fact, DPU could increase in the longer run as Saizen REIT:

1. Embarks on more acquisitions.
2. Continues with share buy backs.
3. Has loans which are amortising in nature.
4. Negotiates for lower interests on new loans.

Fundamentally, Saizen REIT is still very much undervalued. Would I, therefore, say it is still a buy? Well, theoretically, it is. However, I would caution that compared to 13c per unit, the margin of safety that investors like to have is very much diminished now.

Know what you are buying, know the worth of it and decide if you are comfortable with the asking price.

Related posts:
1. Saizen REIT: Daily share buy backs.
2. Saizen REIT: 2H FY2012.

Create more passive income with limited capital.

I have blogged about how Warren Buffet is a "know something" investor whereas I started out as a "know nothing" investor to being a "know a bit more" investor and, now, a "know a bit more than a bit" investor. Warren Buffet buys a lot of something which he thinks is a winner whereas for the rest of us it seems that diversification is the way to go. See: Excuse me, are you an investor?

Obviously, as is seen in my blog's header, I am more interested in building a reliable passive income stream than anything else. So, yield is a big thing for me and REITs naturally have a role to play in my strategy.

The meltdown in the global stock markets after the Lehman Brothers crisis shocked me out of complacency and into action, action which saw me beefing up my FA and picking up TA. I refused to be beaten and I was furiously reading and updating my knowledge, reviewing my past mistakes and planning for the future. 

REITs are a big part of my portfolio and they gave me much angst during the crisis. I also blogged about the lessons learnt. See: High yields: Successes, failures and the in betweens.

I went on to accumulate more units in REITs which met my selection criteria and currently the top three holdings in my portfolio are REITs.  They are Saizen REIT, AIMS AMP Capital Industrial REIT and LMIR.  These are all trading at big discounts to their respective NAVs, they have low gearing (or in Saizen REIT's case, lowered gearing) and high yields (or in Saizen REIT's case, potential high yield).

I was not a unitholder of Saizen REIT when they recapitalised.  I do not have any historical baggage.  I only looked at the numbers in mid 2009 and decided that there was immense value and that there was potential for a very high yield when income distributions resume. Today, the fundamentals have improved and my opinion has not changed. Persistent insider buying suggests a high level of confidence that the REIT is undervalued and that income distribution will resume as promised.  I also like the fact that Credit Suisse is now a major unitholder of the REIT.  See: Saizen REIT: 3Q FY2010 results.

I was a unitholder of MI-REIT and I was not very pleased with the recapitalisation package proposed late last year but I recognised that it was the best way to strengthen the REIT as there were no other viable alternatives (even though the CEO of CIT claimed there was). The renamed REIT is stronger in its balance sheet which is the most important thing in any business, in my opinion.  Why bother objecting to the recapitalisation plan on the grounds that unitholders' equity would be heavily diluted if the balance sheet remained terminally ill? The renamed REIT has the lowest gearing for industrial property REITs in Singapore now, next to the new kid on the block, CLT.  See: AIMS AMP Capital Industrial REIT (MI-REIT).

I have always been a unitholder of LMIR and I stayed positive on the Indonesian economy through the crisis. LMIR's very low gearing means there is little chance of it going to unitholders for funds. In fact, it has more room to gear up if there should be yield accretive purchases available. Even though some might be unhappy with a lack of growth in dpu in the current timeframe and how the forward hedging of the Rupiah/S$ exchange rate does not allow dpu to benefit from the stronger Rupiah, I remain sanguine about the situation largely because this REIT is still delivering a very healthy yield in excess of 10% at the current price. See: LMIR: More units at 10% yield.

Recently, some suggested that I might be overexposed to REITs.  In my usual way, I told them that it really does not matter to me if something I am investing in is a REIT or a company as long as it is able to satisfy certain criteria I have of which high yield is one. I rather concentrate my limited resources on a few good REITs than to spread out over tens of REITs and companies for the sake of safety through diversification.  I think Warren Buffet got it right to concentrate rather than diversify, in such an instance.

Many bloggers are quite comfortable revealing how much they receive in dividends on a monthly basis. I am somewhat less open but I will say that in the month of May, a big chunk of my dividends came from LMIR.  In the month of June, I am expecting a similar amount of income distribution from AIMS AMP Capital Industrial REIT.  Between LMIR and AIMS AMP Capital Industrial REIT, the annualised income distributions I receive could be as much as 4x my monthly salary. It is like getting 4 extra months of bonus every year. You like the idea? I do too.

Things should get better from here as from the month of September, income distribution from Saizen REIT would add to my passive income stream. I might just stop trading the market and sit back, relax and let the passive income stream in.  Of course, it remains to be seen if my calculations as to Saizen REIT's potential income distribution would come to pass.  See: Replies from AK71: All things Saizen REIT.

I remember watching and very much enjoying a cooking program in my teenage days, "If Yan can cook, so can you!". Now, I say to anyone who wants to create more passive income with limited capital, "If AK71 can do it, so can you!"  See: Seven steps to creating passive income from the stock market.