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Saizen REIT: Sanity prevails with more good news.

Wednesday, April 6, 2011

Since starting my investment in Saizen REIT in the later half of 2009 at a price of 13c/unit, the REIT gained in market value and I also received income distributions from the REIT twice. However, the totally unforeseen triple disaster of earthquake, tsunami and the following nuclear power plant crisis wrecked a steadily improving picture.


As I was consistently buying more units in the REIT, to say that I was not in the least mentally or emotionally affected would be untrue. Some were asking me to dump my investment in the REIT, painting horrific images. Some left comments in my blog with words to the same effect and more. Also, news that countries around the world were asking their citizens to leave Japan (due to perceived radiation risks) didn't help.

However, throughout the crisis, I tried to stay calm and rational and, by my own standards, I did it fairly well. I analysed the situation early on and came up with a worst case scenario which suggested that at 13c/unit, the REIT was oversold by panic stricken investors. I stood by my analysis and the fact that insiders were buying reinforced my belief that the unit price was at a floor, if not the bottom.

I could stay calm and rational partly because I was not using any borrowed money or money which I would need in a hurry elsewhere. That we should never invest using borrowed funds or funds needed in the near future is an important principle for all investors.

Some friends would say that I have an added advantage of sitting on a thick cushion of investment gains and dividends accumulated since late 2009. This is, perhaps, true, since at the back of my mind, I knew that I would not be losing any of my capital in the crisis even if the unit price were to weaken further.

The REIT's fundamental and technical pictures have altered somewhat due to the disasters. These changes, I mentioned in an earlier blog post. Read it here. As an investor, we must not be stubborn and I recognise the new reality for what it is and decided to reduce exposure to the REIT when the time is right. When would this be? I have mentioned in a few blog posts that 15c would be the resistance to watch as the gap closes.

Divesting my investment in Saizen REIT partially when it tested and broke support turned resistance at 15c today was something quite mechanical for me. It was the thing to do and I did it. I am not one to be married to my investments.

What does this say about me? I never like selling at supports or what I perceive to be supports. Even in a downtrend, prices would go down a river of hope and selling in rebounds and, hopefully, at resistance is the thing to do.

Does the partial divestment of my investment in Saizen REIT mean that I am turning my back on the REIT? No. I have not closed my position in the REIT, merely lightened it. I remain vested and might even add to my position if the unit price should weaken once more.

Although the partial divestment has erased some of my investment gains, my overall portfolio remains in the black and my capital is intact. Rebuilding my investment gains means that the game is once again afoot.

Oh, if you are wondering what the good news for Saizen REIT is, they have announced a plan which could possibly see YK Shintoku, the last portfolio with a CMBS, unencumbered by end of May 2011. Details? I am going to be lazy here. Please read the announcement here.

Related post:
Saizen REIT: Staying calm and rational.

16 comments:

mrtaught said...

hi ak71

i am glad that you managed to divest some of saizen.. good move!

AK71 said...

Hi mrtaught,

Divesting is easy but divesting at the right price is more challenging. I am glad I have been given the chance. ;)

Thanks for the encouragement. :)

la papillion said...

Hi AK,

Good to see you divesting :) Too heavy will not allow you to sleep through stormy weathers :)

AK71 said...

Hi LP,

I am not so concerned about its size in my portfolio. I was quite happy that it was my largest investment and it was doing so well too.

Well, you know how CW says a bear stole his wealth? A black swan stole mine. ;)

puzzle said...

Hi Ak,ur partial divestment stun me..
Why do u did sell at 0.15 when you could fetch a higher price before the black swam.is it bcz of the unpredictable yet remain in japan?
.good news are.lowing in but u divest coz u feels that it doest worth more then what u perceive previously? 0.125 is the floor or oversold as perceive by u but a mere increase to 0.15 make u tink overwise althgh u only divest partial?

AK71 said...

Hi puzzle,

I was wondering if someone would ask me to elaborate on my decision for partial divestment. I was thinking of having another blog post given the announcement made by the REIT's manager today.

My investment decisions in the stock market since 2009 have been based on a mix of fundamentals and technicals. This does not mean that they get equal weightage all the time.

If you have been following my blog, you would see that Saizen REIT is one counter I blog regularly about. I am constantly updating myself on the fundamentals and technicals.

Prior to the triple disaster, technically, price action was pretty stable with support in the region of 15c to 15.5c. Price went up to 18c for very short periods twice since early 2010 but I did not sell because, fundamentally, I was convinced that the REIT was still undervalued and I was waiting for YK Shintoku to be refinanced successfully in time. If there had been no triple disaster, with the announcement of the repayment plan for YK Shintoku's CMBS, I am sure Saizen REIT's unit price would have broken 18c/unit.

Also, I was sure that there would be income distribution in the meantime and it did happen and twice. Fair value then? I had a target of 21c/unit.

What has changed? Well, both the technicals and fundamentals.

Technically, 16c is now a strong resistance while 15c is the immediate resistance. This is quite clear in the charts. Of course, resistance could become support again but TA is about probability and not certainty. So, a hedge: partial divestment.

Fundamentally, Japan's economy has been really badly affected and it could get worse in the months ahead. The picture is only beginning to get clearer recently.

The area that got hit in Japan is 40% of Japan's economy. With energy shortages nationwide as more than 30% of electricity production has been taken out of the grid, things don't look good.

A weaker economy would also mean that the already lowering values of Saizen REIT's buildings would suffer even more. Investors could give Japanese real estate a wide berth for the foreseeable future just like how the passenger loads to Japan have reduced by two thirds since the crisis started. People are avoiding Japan and things Japanese.

The Japanese Yen initially enjoyed a surge in value after the quake but with the G7 stepping in to stabilise the currency, the Yen has fallen in value by almost 9%. This means that Saizen REIT's NAV and DPU would reduce accordingly.

Saizen REIT is going to use its cash hoard to pay down YK Shintoku's CMBS, it seems. So, how would it fund the repairs required for the 28 damaged buildings affected in the quake? It would probably have to fund this from its revenue and it could affect the income distribution in September 2011 negatively.

So, fundamentally, what is the fair value now? This is by no means an exact science but I had given it a fair value of 21c before the triple disaster. Now, with a weaker Yen, potential cost of repairs and a much weaker Japanese economy, a reduction of fair value by 20% is not unreasonable. New fair value: 17c.

Like I said in this blog post, the technicals and fundamentals have shifted. I recognise the shift BUT I hope I am wrong because it is not just about Saizen REIT but about the Japanese people too.

If I should be right, there would be a lot more suffering for the Japanese and I don't want that.

So, I acted on my beliefs just like I always have when I decided to do a partial divestment. It is never fun to realise a loss but I did it and at a price I am happier with than at the depth of the crisis.

I will keep the funds from the partial divestment aside for opportunities which may present themselves in future.

puzzle said...

Dear ak,
thank for the clarification. Anyway i enjoy reading your post. Will drop by again.

Vested in saizen too.

AK71 said...

Hi puzzle,

You are welcome. I meant to do another blog post on my partial divestment anyway. Your comment brought it forward. Good luck to us all. ;)

Anonymous said...

'The area that got hit in Japan is 40% of Japan's economy.'

Interesting observation, where did u pick this from? Thanks.

AK71 said...

Hi Anonymous,

I got this from my readings online and a gentleman, Dr. Chris Martenson, specifically talked about this in an interview recently.

Watch it here:
“Mortal Wound”: Japan Disaster Could Trigger Global Liquidity Crisis, Martenson Says

Could you include your name or initials in future comments? Thanks. :)

Anonymous said...

Dear Ak,
I enjoyed reading your posts, very well written and articulated.
My confidence in japanese stocks took a beating too after the triple disaster. I am also trying to formulate a position on Saizen reits, hence sharing my thoughts here.
Knowns
a) Interest savings of Y500m per year (original loan amount Y7.1bn) from repayment of Shintoku loan.
b) Income from 1.9bn yen portfolio (formerly encumbered) will be available for distribution, estimated @7% net contribution (based on 2010 accounts) this amounts to Y133m
c) Conversion of 350,000,000 warrants by June 2012, S$31.5m or Y2.1bn, hence do not see intermediate cashflow issues
d) Based on enlarged capital (after warrant conversion) 1 cent distribution costs approx Y850m
Unknowns
a) Repairs on 28 buildings in the affected area, asset valuation Y5.88Bn. Do hope that management comes out with timely assessment of this damage.
b) Income and collection from 28 building (Morioka, Koriama and Sendai) might be possibly be affected, however expect rentals to stay firm due to reduction in residential stocks in affected areas.
c) Risk premium on Japanese assets has gone up
d) Extent of Japanese manufacturing affected by the earthquake.
I like Saizen reits, especially management’s transparency and timeliness of announcement. I like Saizen’s proven history in generating good OPERATIONAL performance. Valuation of Saizen at 38 cent is a mere fraction of current traded price, hence any downward adjustment in valuation still represents good value.
Hate to say this, but seems they are kinda short on luck! Thing is, how often does a CMBS meltdown or a triple disaster strike?
Your thoughts
Kai

AK71 said...

Hi Kai,

Thank you for taking the time and effort in contributing such a detailed comment. I like Saizen REIT and its management too but like you said, it is really jinxed. My response to the points you raised:

a) Interest savings of JPY500m per year from repayment of YK Shintoku loan. - This could be lesser since they have been paying down the CMBS.

b) Income from YK Shintoku will be available for distribution, estimated @7% net contribution (based on 2010 accounts) this amounts to JPY133m. This could be optimistic since more buildings have been divested since.

c) Conversion of 350,000,000 warrants by June 2012, S$31.5m or Y2.1bn, hence do not see intermediate cashflow issues. From now till June 2012, it would depend on how many warrants would be exercised. It is more than a year away but I agree that liquidity risks are low.

d) Based on enlarged capital (after warrant conversion) 1 cent distribution costs approx JPY850m.This would really depend on the strength of the JPY when distribution would take place. I continue to see a weakening JPY over time.

a) Repairs on 28 buildings in the affected area, asset valuation JPY5.88b. I cannot remember exactly but I read in the prospectus that if the expected max damage from earthquakes is 15% of valuation, the management would not insure the properties and they certainly did not. So, let's assume that the cost of repairs is 15% of valuation. ;)

b) Income and collection from 28 building (Morioka, Koriama and Sendai) might be possibly be affected, however expect rentals to stay firm due to reduction in residential stocks in affected areas. The Japanese government has undertaken to build homes for the affected victims free of charge. From what I have gathered, those who have the means are leaving Sendai. I cannot see how demand would improve and I do hope for the status quo to continue. Even if rentals were to stay firm, the JPY probably would not.

c) Risk premium on Japanese assets has gone up Yes and this could affect Saizen REIT's future cost of debt as well as investors' appetite for Japanese real estate.

d) Extent of Japanese manufacturing affected by the earthquake. This, in itself, is a huge problem. What I worry more is how it would affect employment and income. JAL has asked 200 staff to take unpaid leave due to the crisis, for example. On a higher level, the government is going to run into greater deficits. It has flooded the system with money in order to keep the economy from collapsing. The JPY has only one direction to go if this should continue. Jim Rogers thinks that the Japanese will debase their currency.

Good luck to us all. :)

mark said...

So i guess this is where we say goodbye to Saizen. And keep a fraction of the profits we have gained in the market. that's about it.

Anonymous said...

Dear AK,

I do enjoy a good discussion:) 

a) Interest savings of JPY500m per year from repayment of YK Shintoku loan. - This could be lesser since they have been paying down the CMBS.

- Yes, agreed nonetheless expect no less than JPY400m per annum based on current balances, which is substantial.

b) Income from YK Shintoku will be available for distribution, estimated @7% net contribution (based on 2010 accounts) this amounts to JPY133m. This could be optimistic since more buildings have been divested since.

- Took a conservative number based on nett assets of Y1.9bn after repayment of loan and divestment of buildings.

-Yes, management should apprise shareholders of potential exposure from this earthquake ASAP, that’s really bugs me.

d) The Japanese government has undertaken to build homes for the affected victims free of charge. From what I have gathered, those who have the means are leaving Sendai. I cannot see how demand would improve and I do hope for the status quo to continue. Even if rentals were to stay firm, the JPY probably would not.

-It would be safe to assume that some would leave though no clarity on actual number of folks leaving Japan/Tokyo/Sendai yet. I hope there would not be a major nuclear blowout, from a humanitarian pov.

-We know though that they need to house n relocate 200,000 folks in the meantime. I have no illusion about new demand, but real estate supply is most inelastic in the short term, rents are locked in mostly. Yes, building will come, but do not expect them to be ready within the year or two.

c) Risk premium on Japanese assets has gone up Yes and this could affect Saizen REIT's future cost of debt as well as investors' appetite for Japanese real estate.

-Yes, in the short term lest till they sort out the nuclear plant!

d) Can’t agree more with JR, guess the Jap treasury have been trying to do that (debasing) for years!


Logic and spreadsheets tells me that the assets and cash earnings capacity has not been substantially hit…..a dent maybe. But the uncertainty over risks/fear of subsequent acts of nature and nuclear fallout really bugs me.

I see that your position on Jap Yen has a major bearing on your holding of Saizen reits, if it’s not too much to ask, care to share in a separate discussion?

Kai

AK71 said...

Hi Mark,

Things are different now in Japan compared to the time when I started investing in Saizen REIT.

A strong Japanese Yen and a high yield in S$ terms attracted me together with improving numbers and prospects. The attraction has weakened.

AK71 said...

Hi Kai,

Just a couple of points:

1. The Japanese are building houses for evacuees now and these are modular homes which could be built quickly It is not going to take 1 or 2 years.

2. I have great respect for Jim Rogers and he has a big long position in the Japanese Yen. Over the last couple of years, he was of the opinion that the Yen would strengthen and it did. I agreed with his thesis and it was a big reason why I was quite happy to invest heavily in Saizen REIT. Since I derive income in S$, I want a strong Japanese Yen.

Now, very recently, Jim Rogers has had a 180 degrees turn in his opinion saying that the Yen cannot remaing a good long option anymore. He is concerned, I am concerned.

Just to share my experience with the Yen:
When I was visiting Japan for holidays for a few years in a row not too long ago, JPY1000 was S$12.50 at its lowest. It started at $15 and went to $14 and $13 and, then, to $12.50. Of course, in the last 2 years, it surged to $16.

Just a month ago, it was $15.50. Now, it is $14.70. With the Singapore Dollar strengthening, we could see $13 levels again. Why not? A weaker Yen against a stronger S$. This would wipe out 20% of DPU and NAV in S$ terms.

Of course, it might or might not happen although I think chances are it might. Japan's economic and fiscal health are very different from the time Kobe had an earthquake. I am erring on the side of caution, perhaps, but I won't lose money this way.

Anyway, I am still vested in the REIT. Just in case I am wrong, I would still benefit. ;)

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