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Saizen REIT: Acquisitions and long term loans.

Thursday, January 5, 2012

Although I divested a large part of my investment in Saizen REIT, I still like the idea of owning freehold residential real estate in Japan where two thirds of its population rent the homes they stay in.

The Japanese Yen has strengthened against the S$ quite a bit and this could translate to higher income distribution in 2012 for unitholders. Add YK Shintoku's contribution to income distribution and the recent acquisitions which were funded by debt, we could see DPU a bit higher than my last estimate of 1c. Whether the difference is going to meaningful would also depend on how many remaining warrants would be exercised before the next distribution.

I have said that I like the amortising feature of the loans taken by the REIT before. What I also like are the relatively long terms of the loans taken by the REIT. This logically lowers refinancing risks.

The REIT recently took on a loan of JPY500m which partially funded the acquisition of a property in Kumamoto. This is an amortising loan with a 20 years tenure. The interest rate is 3.35% per annum.

For any investor who bought at 13.8c/unit today, if I were to stick to an estimated DPU of 1c per annum, we are looking at a distribution yield of about 7.25%. Of course, I am hoping for a higher DPU.


INVS 2.0 said...

Hi Ak71,

I think the Japan trip may have inspired confidence in you regarding Saizen. Haha. :)

AK71 said...

Hi INVS 2.0,

Haha.. I very much doubt it. Anyone who has been following my blog posts on Saizen REIT would know that I am not saying anything new in this blog post. ;)

In fact, I wonder to myself from time to time how much higher can the JPY go? What if the JPY retreats to $13 to JPY1,000 again which was the case some 4 or 5 years ago? That would see a 25% reduction in DPU in S$ terms from current levels, everything else remaining equal.

There are a few other things that could go wrong in Japan which could affect Saizen REIT badly, of course. However, as an investment, it is really value for money. Deeply undervalued, it was not without some reluctance that I partially divested when I did. It took an earth shattering event for me to do so, literally.

As an investment for income, for now at least, the very strong JPY is good news for unitholders since we are paid in S$. :)

Ray said...

Hi AK,

For the foreign exchange risk, plus Japan's poor economy, this investment must have super high rewards in order to justify the risk involved.

However from the div yield of 7+ %, it is hardly the best yielding REIT out there.

If you're holding it for capital growth then perhaps it may justify it but I might be more inclined in LMIR? :)

AK71 said...

Hi Ray,

I am also of the opinion that macroeconomics favour Indonesia over Japan.

However, there are things to be said in favour of Saizen REIT.

We have to remember that Saizen REIT owns freehold properties. LMIR does not.

Saizen REIT owns residential properties for which demand is rather inelastic. LMIR's properties could see demand ebbing and early termination of leases in bad times.

Saizen REIT's yield seems relatively low now because its loans are amortising in nature. The advantage of such amortisation is long term in nature. Distributable income will improve in time, everything else remaining equal.

Japan is perceived as politically more stable although Indonesia has made some progress in recent years.

All these factors taken into consideration, a 7+% distribution yield from Saizen REIT now is not a bad deal.

I am more concerned about a possible weakening of the Japanese Yen than anything else. The new Japanese government seems determined to depreciate the Yen aggressively and it could be a matter of time.

Anonymous said...


I think another concern that is weighing down in Saizen is Fukushima nuclear incident.

Having so many n.plants around in Japan, and being prone to natural disasters, it is really worrying, in my opinion. And Fukushima had shown the world that we can't contain / control it when something bad happens.

I don't think Japan can live without nuclear too. It is like having time bombs all over the place and nobody is difussing them.

I'm not sure if another similar incident will happen again (but I pray that it won't). But I'm certain it won't be the last earthquake or tsunami in Japan.


AK71 said...

Hi CH,

I have no doubt that the March 2011 triple disasters would stay on the mind of Mr. Market for some time to come.

Few countries in the world are sheltered from natural calamities like Singapore is. Of course, we have to fight floods in Orchard Road from time to time but that hardly counts. ;p

The Japanese could have grown complacent and overly confident in their measures to guard against natural disasters. They will hopefully redouble their efforts to ensure measures in place are adequate.

Anonymous said...

Hi AK,

Happy New Year to you and all fellow blog readers!

Great to see your posts, and notice you update your blog very frequently!

And, yea, the speed at which you reply to commments is amazing too!


Cory said...

I am kind of surprise 2/3 of Japanese rented their home. Why are we not getting higher yields ?

With the currency exposure and Poor Japan economic affecting valuation, a shift in the reit price of just 1 cts downward, will cost the year distribution and provided we have higher yield.

STI is on down trend too. So is the odds against us ?

AK71 said...

Hi Tree,

2012 will probably see me blogging less frequently and I could also take a bit longer to reply to comments. I am making changes to my life.

For example, the last few days, I spent a lot more time with my family. Apart from the regular yoga and gym sessions with mom, I went shopping with my sis and niece as well. I also played badminton with my niece and had lunch with my mom.

I spent time catching up on other hobbies which I have neglected quite a bit in the last two years (since I started blogging, essentially) too.

I will still blog as and when I fancy. As for comments, I will still try to reply in a timely manner. However, I must beg your pardon if I am somewhat tardy. ;p

AK71 said...

Hi Cory,

In a country where property prices have been in decline for 20 years, most citizens shy away from buying a home as they could end up with a depreciating asset. Hence, the preference to rent.

If you are interested in Japanese real estate, you might want to read a blog post I did 2 years ago here:

Buy Japanese real estate.

If not for the amortising nature of Saizen REIT's loans, DPU could easily be 50% higher. How many S-REITs have amortising loans, I wonder?

If you would like to see a higher distribution yield before investing in the REIT, it is your call, of course. A greater margin of safety is always a nice thing to have. ;)

ALEXIS said...

Hi, I am also an investor in Saizen. Unfortunately, I was in this right from the day one when it was trading at $1.

The huge discount to the NAV is incomprehensible. Mgt has suggested looking into buybacks to narrow the discount but they have not done anything for the last 18 months.

Any theory as to why management (backed by Value Fund) refuses to buy back the shares?

AK71 said...

Hi Alexis,

If the management is able to secure yield accretive purchases, I would rather they do so instead of buying back shares.

If they are unable to put any excess funds to productive use, then, they should consider buying back shares from the market.

Scooby Doo said...

Buying back the stock at <0.5X NAV would be far more accretive than buying properties. One reason we aren't seeing meaningful buybacks is that asset manager fees would be lower if they did so. Management would rather grow the property base and collect fees rather than enhance the unit price/NAV/dividend yield. Classic conflict of interest.

AK71 said...

Hi Scooby Doo,

An interesting observation. :)

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