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Saizen REIT: DPU of 0.63c.

Thursday, August 22, 2013

Despite a much weaker JPY, Saizen REIT has delivered a respectable income distribution in S$ terms, a DPU of 0.63c to be precise.

Saizen REIT's DPU in JPY terms has been improving steadily in recent years. In the last half a year, DPU in JPY terms has shown an improvement too but a much weaker JPY means that DPU took a hit in S$ terms.

Income in JPY terms climbed mainly due to new acquisitions. Of course, a buy back and cancellation of shares also helped.

As of 30 June 2013:

NAV/unit: 25c
Gearing: 38%
Interest cover ratio: 6.0x

To reduce the impact of a weakening JPY on income distributions in S$ terms, Saizen REIT's management entered into hedging transactions.

The rate for the 6 months period which ended on 30 June 2013 was JPY75.12 = S$1.00. The rate for the 6 months period ending 31 December 2013 is JPY 81.15 = S$1.00. It is going to be some 14% costlier to buy S$, it seems. So, if I read this correctly, we should see downward pressure on the next income distribution in S$ terms, everything else remaining equal.

Saizen REIT has refinanced and in so doing brought down its average interest rate as well as its rate of amortisation. Yes, regular readers will remember that Saizen REIT's loans are amortising in nature. It will also not see any loan maturing until four and a half years later in February 2018.

So, is reducing the rate of amortisation a good thing? Well, it will mean that the REIT will have more income from operation available for distribution. However, it is unlikely to mean a higher income distribution in JPY terms because the REIT is currently using its cash resources to offset amortisation in order to free up more income from operations for distribution to unit holders anyway. It will, however, mean that there is less strain on the REIT's current cash resources.

The management is also proposing to do a 5 to 1 unit consolidation. This is a bit of a déjà vu. I remember the time when AIMS AMP Capital Industrial REIT did a 5 to 1 unit consolidation too. Fundamentally, it really doesn't change anything.

Qualitatively, investing in Saizen REIT now is to invest in freehold Japanese residential properties at a discount to their valuations. If we believe that the Japanese economy will enjoy a revival as Abenomics gain traction, then, Saizen REIT could be a good proxy as the country frees itself from deflationary forces.

The REIT's numbers are good but the persistent weakness of the JPY as the BOJ stays the course with its own brand of QE is going to lower income distribution in S$ terms in the foreseeable future. A conservative forecast of 1.1c in annual DPU would mean a distribution yield of 5.8% assuming a unit price of 19c. Compared to J-REITs with residential properties in Japan, this is relatively high and although it is not particularly cheap at current prices, Saizen REIT is not overpriced.

See FY2013 presentation: here.

Related post:
Saizen REIT: DPU of 0.66c.


SnOOpy168 said...

5 to 1, again I will get hit with odd lots.

Sell the pre-odd lots now or buy-in more to ensure no odd lots. Either way, will face brokerage charges that makes no sense for small qty.

A bit of irritation here.

AK71 said...

Hi SnOOpy168,

I am quite sanguine when it comes to odd lots if an investment is one which I am holding for the long term (or maybe forever). I am talking from experience, of course. ;)

If it is a long position which I am thinking of as a trade, then, yes, irritation city.

SnOOpy168 said...

How do you feel the Japanese residential rental market will be effected by the weaker yen and the leaking radiation waters ? Not forgetting the new PM's policies.

AK71 said...

Hi SnOOpy168,

Demand for housing is relatively inelastic. Unless we expect the Japanese people to die off or move out rapidly, it is realistic to believe that Saizen REIT will see consistent demand for its properties.

The weaker JPY is a good thing for the Japanese economy as it frees the country from deflationary forces. The benefits of mild inflation is well researched and the people will benefit in due course. It will mean higher asset prices and rental rates over time.

In a country where most of the people are renters, this is good news for Saizen REIT.

As for Fukushima, this is something which Japan will deal with for years to come. None of Saizen REIT's properties are found there. The nearest are in Koriyama and Sendai. I cannot tell how Fukushima will affect life in these places. So, I cannot comment.

However, I did factor in a worst case scenario before which is a complete lost of buildings and income in Sendai, Koriyama and Morioka. This would knock 15% off valuation and income.

"Sendai is about 100km away from the two plants while Koriyama is more than 60km west of the plants. I checked Saizen REIT's website and found that Morioka is north of Sendai and is therefore farther from the plants."
Source: http://singaporeanstocksinvestor.blogspot.sg/2011/03/saizen-reit-sendai-koriyama-and.html

In such an instance, NAV would reduce to 21.25c. A conservative estimate of DPU would reduce it to 0.935c per year.


Hi AK and readers,

Looking at the current report, I was pleased as I expected worse due to the ups and downs of the Jap market due to Abenomics and the weakness in strength of the Yen. A DPU of 0.63 is certainly decent and respectable. This is due to the capable management of Saizen and I'm optimistic of more good things to come.

Looking at CMF, RSI of Saizen, it's also doing a lot better as compared to other REITS like CLT and AIMS, which is certainly a pain for holders, us included. A lot of money is flowing out of the S REITS universe and this has definite connections with QE.

Some might be tempted to jump into REITS due to the nice corrections resulting in year lows but I would like to caution one not to simply look at price action. All things being equal, if QE officially comes in Sep, then who knows what Mr Market would do and he is certainly very ball-less at this moment.

Anyway, for Saizen holders, cheers and enjoy our half yearly ang pao coming in Sep.

AK71 said...

Hi Solidcore,

I agree that the management of Saizen REIT has delivered the goods. If they had not hedged against the fall of the JPY, income distribution in S$ terms would be much lower for the half year ending June 2013. :)

Realistically, however, we should expect income distribution to be lower in S$ terms for the next six months. Still, I believe that the pain is short term in nature. By this, however, I mean a couple of years.

AhJohn said...

Hi AK, consider interest rate upward trend, do you think the point to re-enter REITs is 10% yield? Rather than 8% at normal cycle.

AK71 said...

Hi Ah John,

It would also depend on which REIT we are looking at. For some REITs, a 5 to 6% distribution yield is the norm in a low interest rate environment. So, if risk free rate were to rise by 2%, for these REITs, investors might demand a 7 to 8% distribution yield and not 10%.

Personally, if AIMS AMP Capital Industrial REIT were to offer me a 10% distribution yield if risk free rate should rise 2%, everything else remaining equal, I would buy. ;)


Hi John,

From AK's wise words... always depends on what your motivation is. Are you aiming for 10%? or 8%? Which helps you to sleep better at night? :)

My Saizen portfolio now roughly gives me 7% or so in a risk free of 2%, its going to drop to 5%. Not that great so I might want to average down if the opportunity presents itself.

However, is now a good time to buy? CMF, RSI aren't doing so well so most likely I'll expect a drop in Saizen prices in the coming weeks.

My 2 cents worth so always feel free to disagree :)

AK71 said...

Hi Solidcore,

I feel that I have to add something to your comment. I will blog about it later. ;)

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