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Saizen REIT: A foreign talent!

Wednesday, May 28, 2014

This blog post is written in reply to a comment by a reader with regards to Saizen REIT. Read the reader's comment: here.

My reply:

Hi Simple Boy,

The way in which you annualised the income distribution is valid. It is always an estimate anyway and discussing whether it is accurate or not won't be very meaningful, I feel. So, I shan't be crunching numbers here.

As for comparing Saizen REIT's distribution yield against those of other S-REITs', I think it could be doing Saizen REIT an injustice to do so.

Firstly, different property types will command different yields and certain property types command higher yields. Saizen REIT owns residential real estate which, usually, are lower yielding. However, the demand for rental properties is relatively inelastic, especially in a country like Japan where the majority rent their homes. We don't have another REIT in Singapore that holds residential real estate for us to do a comparison against Saizen REIT.

Secondly, in the world of S-REITs, Saizen REIT is a rather strange animal because it doesn't have any properties in Singapore. All of its properties are in Japan. So, should we really call it an S-REIT or should we call it a J-REIT? I am inclined to think of it as a J-REIT that has a PR status in the world of S-REITs. Foreign talent, you know?

So, if we want to compare apples with apples and if we take a look at J-REITs, we would discover that it is rare to find those with distribution yields of 6% or higher.

Of course, to really compare apples with apples, we should compare Saizen REIT with J-REITs which hold residential real estate. There are quite a few J-REITs holding residential real estate but here are some numbers from 3 such J-REITs with the second last column representing the annualised distribution yields.



Click to enlarge.
Source: Tokyo Stock Exchange.


So, in the world of residential properties J-REITs, Saizen REIT would look very attractive now.

Could we see Saizen REIT's distribution yield declining to become closer to what J-REITs are offering now? I don't know. I need a working crystal ball to answer this question. My bowling ball struggles but cannot make it. However, I do know that distribution yield will decline if DPU falls or if unit price increases. 

So, what should we as income investors do? We look at how the DPU could fall, given all the information which we have. When we do this, we are actually assessing the level of sustainability of the REIT's income. There is no point in wondering how high the price could go or is there?

Of course, if someone would prefer to invest in S-REITs with higher distribution yields compared to Saizen REIT, there isn't anything wrong with that. However, making investment decisions based purely on distribution yields would be somewhat myopic.

Related post:
Saizen REIT: Rewarding patient investors.

25 comments:

Simple boy said...

Hi AK,

Thanks for your insight. I knew I was missing something but couldn't figure it out. Dint expect an entire post based on my naïve comments. Much appreciated and look forward to your presentation in the seminar.

AK71 said...

Hi Simple Boy,

For sure, I don't know everything. So, I am still learning along the way but I am happy to share what little I know.

You will be going to the event on 14 June too? I hope you enjoy it. See you. :)

Capricon said...

一针见血。

AK71 said...

Medic! Medic! ;p

Simple boy said...

Hi AK

Was reading your post again to let it sink in further. However, it just generates another question. You mentioned that ""making investment decisions based purely on distribution yields would be somewhat myopic".

Once again, pardon my naivety, but wouldn't one of the important factors when allocating capital is the rate of returns? Of course one has to take into account the risk factor and comparing against the rate of returns. So if one were to say that one is willing to bear the additional risk of instability of S-REIT industrial against stability of J-REIT residential for an additional 1-2% more returns, wouldn't that be justified? Just thinking aloud.

AK71 said...

Hi Simple Boy,

For anyone investing for income, dividend is a major consideration. However, I would say that it is just a starting point.

There are many other factors to consider, I am sure you know. So, after considering these other factors, we have to decide if the yield is still attractive.

Similarly, and this is more difficult, an investment's yield might not look attractive but after considering other factors, it might not look bad after all.

Depending on what we are after, our portfolio of investments would reflect our motivations. So, if we value yield over other factors, then, our portfolio will reflect this.

I cannot tell you if you are right or wrong by choosing to invest in an industrial properties S-REIT instead of Saizen REIT. How could I? How could anyone?

When I build a portfolio of investments for income, apart from yields, I think about sustainability. Is the income stream sustainable?

I also look at the asset quality and value, the financials and the management, amongst other things.

If income looks sustainable, good. If the investment looks undervalued, even better. If it looks like there could be a catalyst for re-rating upwards, that is a bonus. :)

So, when people ask me if I have a standard process, I tell them I don't. I keep my mind open.

Anyway, it is late and I am just rambling. You have the answer, not me. ;)

Richard Ng said...

Hi AK Thanks for yet another indeph dissection of Saizen REIT Learn something new again

Thanks

Ray said...

Always valuable advice. :)

AK71 said...

Hi Richard and Ray,

Yikes! I was just talking loudly to myself as usual. -.-"

raf said...

Hi AK
Interesting insights. Having invested in what is effectively a non-Spore reit, what are your thoughts about investing in reits registered in other countries or in ETFs comprising reits with attractive yields.

AK71 said...

Hi raf,

Whatever we invest in, we have to do our due diligence. It doesn't matter if we are investing in REITs or stocks or if they are in Singapore or somewhere else. Due diligence is quite a bit of work and I try to keep it simple.

Already, if we choose to invest in a REIT or a Trust which has properties scattered in various countries, due diligence would be quite demanding. To invest in an ETF that is actually a basket of REITs? That would be a nightmare. Well, at least for me, it would be.

As for investing in REITs in other countries, that would require familiarity with the rules governing REITs in these countries. At the moment, that is beyond me.

Anyway, I am not super rich and Singapore offers me enough income investing opportunities. So, I am a contented frog in my well. :)

SOLIDCORE said...

Hi AK ,

Another well written post. Luck would have it that after your post , the counter popped and that brought joy to existing holders for sure .

By the way , Mr Market believes in patient holders for another counter that we both are in as well. A handsome gain of 5+% today and still under NAV . Since this counter has now been reorganized into your growth group , curious to know when would valuations be rich enough

AK71 said...

Hi Solidcore,

Oh, I believe that luck is very important in everything we do, including investing in stocks. We should be suspicious of anyone who claims that he has done well in his investments because he has perfect foresight. ;p

As for Marco Polo Marine, when I moved it higher up in the pyramid, the valuation didn't change. What has changed is the amount of exposure to the stock.

Everything remaining equal, I am willing to have a bigger exposure to a stock that gives me income and growth compared to one that only promises me growth. That is how the income investor in me thinks. :)

Capricon said...

AK,
But it is hard to find a gem that offers both growth and income unless at times of crisis.
Do you mind sharing any such gems under your radar ?

:)

AK71 said...

Hi Capricon,

Oh, if I do find something, I will probably blog about it. :)

"The big money is not in the buying and selling … but in the waiting. It takes character to sit there with all that cash and do nothing." Charlie Munger

AK71 said...

"You need a different checklist and different mental models for different companies. I can never make it easy by saying. ‘Here are three things’. You have to derive it yourself to ingrain it in your head for the rest of your life."

Charlie Munger

Janice said...

Hello AK,

Any news on Marco Polo?

Today went up a lot.

AK71 said...

Hi Janice,

I didn't see any announcement. So, your guess is as good as mine. :)

Nightmare_Angel said...

Hi AK71,

Sorry to hijack your post. Understand you are a shareholder of YangZiJiang and what's your take on this news?
http://www.sinoshipnews.com/News/Rail-company-calls-for-investigation-into-shipbuilding-tycoon-Ren-Yuanlin/3w3c2686.html

Mr. Ren is like the soul of the company and apparently this news doesn't have any impact on the share price. Interested to hear your input on this news. Many thanks.

Regards
Qin Liang

AK71 said...

Hi Qin Liang,

Nope, I am not a shareholder. I believe that Mike (blogmaster of Sillyinvestor) is a shareholder. I hope he sees this and gives us his take on this. :)

Nightmare_Angel said...

lol! I realized I got the info from Mike's blog! :o

Will re-evaluate my position and see if I'm going to follow suit.

Regards
Qin Liang

Andy said...

Marco polo Marine had been tagged as the Top Alpha pick by DMG in its latest report on the offshore marine sector.

http://research.dmg.com.sg:9898/UploadPDF/SG_Offshore%20&%20Marine_Shallow%20Water%20Is%20The%20New%20Onshore_20140529v.pdf

AK71 said...

Hi Andy,

Thanks for sharing this. :)

SOLIDCORE said...

Hi Andy,

A very interesting read. Thanks as well.

AK71 said...

See Mike's blog for his take on YZJ: Sold YZJ.

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