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Saizen REIT: 2H FY2012.

Thursday, August 23, 2012

Thanks to its recent acquisitive activities, paying down of its loans and a strong JPY, Saizen REIT is able to declare a higher DPU of 0.63c for 2H FY2012. This is payable on 18 Sep.

Therefore, the expected reduction in DPU of 10+% with the conversion of its warrants did not materialise and Mr. Market has shown his approval in the usual way as unit price of the REIT climbed higher today.



Net gearing: 24%
Interest cover ratio: 6x
NAV/unit: 30c

Annualising the DPU of 0.63c would give us 1.26c or a distribution yield of 7.875% at a unit price of 16c. Everything remaining constant, the DPU is likely to increase as the REIT's management continues to look out for apartment buildings to acquire and pay down its loans which are amortising in nature.

I have mentioned before that if the REIT's loans were not amortising in nature, its DPU could be some 50% higher than it is now.

The management has also indicated it could buy back units from the open market if unit price should be depressed. This would also improve DPU if it should happen.

All in all, I am very pleased with Saizen REIT's results.

With numbers very healthy and operations stable, Saizen REIT is very much undervalued. I believe a 30% discount to NAV/unit is closer to fair value. That would be 21c per unit.

Assuming that there is no new acquisitions from here on and everything else remains constant, at 21c a unit, we would be looking at a distribution yield of 6%. Bearing in mind that this would likely improve in time due to the amortising nature of the REIT's loans, everything else remaining constant, makes Saizen REIT a strong value proposition for anyone investing for income.

Results presentation slides: here.

Related posts:
1. Saizen REIT: Why did I buy and would I buy more?
2. Saizen REIT: Beefing up distributable income.

31 comments:

SnOOpy168 said...

Nice update AK. Happy to hear this. While I still like to diversify a bit from industry REITs with new funds. Sadly, i did not load more earlier. Hinsight 20/20 lah.

It leads down the another question. Why 6% ? was it a market norm or just some REITs avg yield ?

AK71 said...

Hi SnOOpy168,

I want to show that if unit price were to rise to 21c, we could still be looking at an attractive distribution yield of 6%.

The average distribution yield of J-REITs is about 5%, if I remember correctly.

Mr. Market here seems to apply a discount to REITs with properties which are not located in Singapore. So, I don't expect distribution yield for Saizen REIT to be compressed to 5% anytime soon, however.

I would continue to accumulate units in Saizen REIT but would only do so on price weakness.

INVS 2.0 said...

Hi Ak71,

Wanted to buy this but I was concerned about the currency risk of Yen. :(

But I bought more of Lippo and now the price is going further up, giving me a little capital appreciation. :)

Howyuan said...

Well done once again AK. You bought recently when it hit a low of 0.13. That's a 25% gain since then. Your TA/FA is damn good.

I should stop working and follow you instead :P

AK71 said...

Hi INVS 2.0,

Your consideration of forex risk is a reasonable one. However, LMIR is also exposed to forex risk.

If you want to eliminate forex risk and yet want foreign real estate exposure, the S-REIT to consider is First REIT. :)

AK71 said...

Hi Howyuan,

It actually went under 13c and I was hoping that it would get even cheaper. ;p

My skills are nothing to crow about. They are rather run of the mill. However, I know Saizen REIT a bit better, I believe. So, this is an example of how knowing something well is an advantage.

Just to show you how I am not "damn good", I hope you did not follow my more disastrous decision to be vested in Wilmar when I did ... ;p

JCK said...

Nice catch AK

i was one waiting for 12c.....alas

Didnt manage to catch any? :(

AK71 said...

Hi JCK,

The lowest it went to was 13c during the triple disasters in Japan. So, any price under 13c was a real bargain.

12c per unit is a price that would have made me go into a feeding frenzy. It could have happened but it did not, unfortunately.

Howyuan said...

Don't worry AK, i am only interested in stocks with dividend. Wilmar isn't on my list :P

And while we are at Japan, who thinks they will run into fiscal cliff similiar to US by Oct 2012 due to politicking? JPY plunges?

I read that without additional borrowing from open market, government has to terminate some benefits and consumptions may be disrupted.

AK71 said...

Hi Howyuan,

Wilmar does pay some dividend but the yield is paltry even based on the current lower share price. Investing for income, this stock is definitely off the radar.

Japan has her issues and in earlier blog posts, I also painted a worst case scenario for the JPY.

A return to a cheap JPY? I remember S$13 per JPY1,000 when I was travelling yearly to the country for holidays? Possible. That would mean a 20% reduction in DPU in S$ terms.

If someone investing for income is able to accept that possibility, everything else remaining constant, Saizen REIT is still an attractive proposition. :)

INVS 2.0 said...

Hi Ak71,

But First is very overvalued now. :( I rather buy Saizen in this case.

AK71 said...

Hi INVS 2.0,

Not to worry. I am not suggesting that anyone buy into First REIT now. There could be a better time to buy. ;)

VK said...

Hi AK71,

From what I understand, 0.32 cents of the DPU of 0.63 cents is from capital reserves to offset principal repayment.

Cheers,
KV

AK71 said...

Hi KV,

Yes, they paid down some of their loans. :)

I wanna be said...

Hi AK

At 16cents now, is saizhen a good investment or we should wait until EX- Div?

AK71 said...

Hi I wanna be,

It really depends on your definition of "a good investment".

If you feel that the current distribution yield is good enough for you and you do not mind possible fluctuations in the REIT's unit price, it is a good investment now.

If you feel that you might be upset if the unit price declines by more than its DPU of 0.63c upon XD, then, it might not be a good investment now.

Of course, I have no way of knowing if its unit price would decline or not upon XD.

Your call. ;)

r said...

Hi AK71,

What is your take on these 2 weeks of trading for Saizen. It seems quite volatile to be touching near highs and than dropping back and touching 0.161 and 0.160 (2 times in fact)

AK71 said...

Hi r,

Saizen REIT is rather thinly traded. So, bigger swings are normal.

I don't think we have to be concerned with its volatility per se. What we want to do is to get in at a good price and hold for the regular distributions if we are investing for income. :)

AK71 said...

Saizen REIT bought back 680,000 units on 25 Sep at 16c per unit.

Kim said...

Hi AK
Why did Saizen bought back their share fr the market? The price is not depressed ma.

AK71 said...

Hi Kim,

Well, it can be rather subjective but if you think about its NAV/unit which is about 30c, a market price of 16c per unit seems depressed. ;)

If the management has no productive use for money on hand, I rather like the idea of them buying back units from Mr. Market. It enhances value for existing unit holders. :)

AK71 said...

The buy back on 8 October 12 was at 16.6c per unit.

Total: 900,000 units.

AK71 said...

Another buy back happened on 15 October 12: 350,000 units at 16.6c per unit.

CS said...

Hi AK
Glad that your investment in Saizen is fruitful. I am not familiar with this reit but after reading some of your posts, I find it quite attractive. This reit has improved significantly in the past year with better financial position. I also like it's steady stream of rental income and steep discount to NAV. However I don't fully understand the structure of this Japanese reit. I am somewhat concerned that the reit's properties are not registered in the name of the trustee but in the name of the respective TK operators which have direct control of the assets and should a TK operator become insolvent, the reit may lose control of the property. Under such arrangement, how are the rights and interest of shareholders protected? It seems to me that the properties which are the source of income of the reit's investors are handled at the mercy of the TK operators and we have no idea how reliable and strong are these TK operators.
Would you kindly enlighten me on this.
Thanks
C.S.

AK71 said...

Hi C.S.,

Saizen REIT has 100% ownership of TK interests. The TK operators are in turn the owners of the properties which generate income. So, you are right. There is an additional layer.

Saizen REIT's management has very close ties with the TK operators and pay them regular visits. I believe they are almost one and the same on an operational level.

As for the competence of the TK operators, from the quarterly and annual reports, I think their performance is above par as occupancy and rates are above average.

Of course, you have a point. Although Saizen REIT is entitled to 97% of the profits generated, it is also reqired to bear 97% of losses incurred by the TK operators if they should happen.

I cannot imagine how a TK operator here could become insolvent as gearing is comfortable and occupancy averages 90% but in the event it should happen, as Saizen REIT has 100% ownership of TK interest, I assume it would have rightful claim to all the TK's assets and liabilities.

WS said...

JPY/SGD has weakened from 0.0159 in Sep to current level 0.0143. About 10% in 3 months.

With the new Japan PM targeting for 2% inflation yearly, some sort of QE will be planned for and JPY/SGD may weaken further.

http://sg.finance.yahoo.com/echarts?s=JPYSGD%3DX#symbol=;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

AK71 said...

Hi WS,

There is a real possibility for the JPY to weaken to S$13.00 per JPY1,000 again in the coming year. Time to plan for a vacation in Japan perhaps. :)

CS said...

We are all concerned about a weakening Yen as the income we receive from Saizen is in S$. I was wondering why the mgt did not hedge the income so as to reduced the FX impact? Some of the S$ nominated unit trusts that invest in foreign securities have hedged class which normally perform better than the unhedged class.
Regards,
CS

AK71 said...

Hi CS,

Well, LMIR's management always did 100% hedging and I am not impressed with the results. They lost more money through their hedging efforts than anything.

Anyway, Saizen REIT's management has done OK so far. I will wait and see how things unfold from here. :)

SnOOpy168 said...

"Saizen REIT’s distribution of 0.66 Singapore cents per unit for the six-month financial period ended 31 December 2012"

Super ang pow for us.

AK71 said...

Hi SnOOpy168,

Definitely a pleasant surprise. I was expecting a reduction in DPU due to the weaker JPY. :)

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