Passive income with high yields: Saizen REIT

I've talked about a cyclical stock (Golden Agriculture) and a growth stock (Healthway Medical). Now, it's time to talk about my favourite topic: yield stocks.

I've always liked high yields. Who wouldn't be attracted to a 10% yield which is 100 times more than the interest payment from a good ol POSB bank savings account? 

Of course, it's not that simple.

In this last financial crisis, I learned the hard way that high yields might come with high risk. REITs which had high gearing levels crashed despite their high yields. Some went bankrupt (like a couple in Japan). All suffered lower valuations on their properties and most suffered from lower revenues. These affected the NAV and the distributable income respectively.

In Singapore, all the REITs have survived and many have managed to raise capital either through rights issues or share placements.

I believe that majority of the REITs in Singapore will continue to appreciate in time with stronger balance sheets and a stronger economy.

In fact, many have doubled or tripled in price since the March lows. Some are even trading above their NAVs! It's harder to find value now.

A REIT which I am accumulating is Saizen REIT. It owns residential buildings in Japan. The demand for such properties is relatively inelastic.

 

The occupancy rate has been consistently above 90% even through the crisis. Its financial health has improved with a successful rights issue earlier this year and a suspension of distributions to repay loans.

In one scenario, we could see the gearing level drop to less than 20% and its NAV drop to 29c by 2012. The manager plans on resuming distributions in mid-2010. By my calculations, we could see a dpu of about 2c per annum. The REIT closed at 15c today. This means a potential yield of 13.3%.

Soon, Saizen REIT's gearing will be lower than many S-REITs. Anyone who is concerned about its debts should go take a look.

The question many would ask now is if this is a good time to buy.

Charting shows a symmetrical triangle. It reminds me of the symmetrical triangle I saw in Hyflux Water Trust's chart many months ago. Apex of triangle is in late Feb 2010. Expecting price to breakout on the upside anytime before then. Strong support provided by the rising 200dMA which coincides with the uptrendline of the symmetrical triangle. This is at 14c. Expect strong resistance to be provided by the rapidly descending 100wMA, currently at 22c. Limited downside compared to the potential upside.

Good luck to us all.