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.
Saizen REIT: Acquisitions to increase DPU.
See Saizen REIT's May 2012 presentation: here.