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Saizen REIT: Undervalued and possibly more so.

Sunday, May 25, 2014

On 23 March, I explained why investing in Saizen REIT at 88c a unit could be more palatable for some than investing in an apartment in Japan. Two months on, Saizen REIT is trading at a high of 93.5c a unit. It seems that Mr. Market's sentiments towards the REIT have turned positive. Sentiments? Yes, price movements are probably the result of sentiments. The value of the REIT has not changed.

A possible catalyst in the upward movement of the REIT's unit price is the announcement on options to enhance value for unit holders and this is going to happen sometime in the first half of June which is next month. My expectation is for a return of capital to happen. How much capital will be returned to unit holders, however, is harder to say.

A return of capital is going to have trade offs, not only in terms of future DPU for the REIT's unit holders but also in terms of the REIT's gearing level which will most definitely rise by a few percentage points although it is unlikely to go beyond 40%. This could be mitigated by the gradually rising prices of residential real estate in Japan which could mean a revaluation of Saizen REIT's properties is on the horizon.

When it comes to valuation, there is always a question as to whether valuations are realistic. After all, if valuations had been artificially elevated which is a form of financial engineering, then, things could go bad during crunch time. So, it is prudent to ask if Saizen REIT's properties' valuations are realistic too.

Actually, I believe that Saizen REIT's properties' valuations could be too low now.

During the global financial crisis when the REIT suffered from the CMBS' stampede for the exit, its properties were being sold very close to valuations in order to repay the CMBS for YK Shintoku (one of the REIT's many portfolios of properties) which suggested that the properties were valued realistically. More recently, however, on 19 May 2014, Saizen REIT announced the sale of one of its properties for JPY60 million. The property in question was valued in June 2013 at JPY50.4 million. This means that the property was sold at a 19% premium to valuation!

Now, imagine if the REIT's portfolio of properties were to undergo a revaluation of similar proportion. Even after a return of capital, the REIT's NAV per unit could be much higher than what it is today. This would mean that the REIT could become even more undervalued, everything else remaining equal.

For many people, the question might be whether it is a good time to buy into Saizen REIT. Honestly, I do not have an answer to this although those who did buy at 88c a unit when I last blogged about the REIT could be smiling now. Mr. Market could enter a bout of euphoria if there should be a return of capital to unit holders which exceed expectations. This could push unit price closer to current day NAV which is about $1.17 per unit. Whether it would happen or not is in the realm of speculation.

What I do know is the current value of the REIT and that at 93.5c a unit, it is still undervalued. There is also a probability that it could become even more undervalued in future.

I also know that the REIT's debts are amortising in nature and that it is reducing the total debt by a few percentage points every year.

I know that the REIT's debts are in JPY terms and this provides a natural hedge as its properties are all in Japan and valued in JPY.

I know that it has a robust interest cover ratio (i.e. NPI divided by interest expense) of 6x.

As an investment for income, Saizen REIT is likely to continue to be a consistent performer and as Abenomics gain traction, there could be positive surprises as valuations climb. Logically, we could also see rental income improving in due course.

Saizen REIT was one of my top 5 investments in S-REITs. Having reduced my exposure to LMIR and Sabana REIT, Saizen REIT is now one of my top 3 investments in S-REITs, together with AIMS AMP Capital Industrial REIT and First REIT.

Saizen REIT could turn out to be a very rewarding investment for me this year.

See Saizen REIT's presentation in May: here.
See recent announcement on divestment: here.

Related posts:
1. Apartments with rental yields of 4.95% to 7.3%.
2. Is the half yearly DPU of 3.25c sustainable?
3. Saizen REIT: Special dividend?


Investopenly said...

Sounds like good tip, will check it out. Thank you in advanced!

FT said...

Either you have an impeccable timing with this post or you move market with your post!! Your crystal ball must be crystal clear! :)

AK71 said...

Hi Richard,

Oh dear. Just talking out loud to myself as usual. I didn't do any tipping of anything at all. -.-"

AK71 said...

Hi FT,

I just checked. It still looks like a bowling ball to me. -.-"

Don_Jerome said...

Looks like crystal ball to me. After your post break 0.935 resistance convincingly after trying for more than a week.

seefei said...

i printed out the presentation. like what i see. added more to my portfolio.

thanks AK

AK71 said...

Hi Jeremy,

My bowling ball and I plead innocence. -.-"

AK71 said...

Hi seefei,

I am glad Saizen REIT passed your due diligence. :)

durianboy said...

Hi Sir,

What does it mean by the debt is amortising by nature?

AK71 said...

Hi Mr Koh,

Amortising loan:

"A loan for which the periodic payments consist of both principal and interest such that the loan will be paid off by the end of a scheduled term."

As opposed to non-amortising loan:

"A type of loan in which payments on the principal are not made, while interest payments or minimum payments are made regularly."

Source: Investopedia.

durianboy said...

Hello Sir,

Thank you very much!

Unknown said...

Hi AK71,

"Japan to open its doors wider to foreigners"

Based on the above news, I suppose Saizen REITS will benefit if the policy goes thorough?

AK71 said...

Hi Adarina,

We have been waiting forever for this. This is the obvious solution to Japan's demographic woes. :)

Demand for housing will definitely increase when population grows. ;)

Capricon said...

Unfortunately nothing exciting after the review :


AK71 said...

Hi Capricon,

Ah, no return of capital.

"As funds are made available as the capital structure is
optimised, the Board will continue to seek opportunities to expand its property portfolio in line with the principal investment strategies of Saizen REIT.

"The Board may also consider a buy-back of Units of Saizen REIT at times of Unit price weakness, as a useful signalling mechanism and provided that is deemed as an effective use of capital at that time."

If they can continue to find yield accretive deals to help bump up the DPU, I don't have a problem. :)

Earn Money Online said...


Thanks for the write up on Saizen. Was wondering whether can I have your comments/feedback on Asian Pay TV? It has a good yield of more than 10%. Is advisable to add as part of the portfolio for income investing?

AK71 said...


When we invest for income, we want to question the source and the sustainability of the income distributions.

After going through the annual report of APTT, I am not sure that the income distributions are sustainable in the longer run.

So, I have not added to my legacy position in the Trust. I will wait and see.

All investments are good at the right price. ;)

Unknown said...

Hi AK,

Thanks for the great information so far.

Had chanced upon the following.

Assuming it is true, it seems a BIG hit to Japan as a whole..

Thus may we know your thoughts on this, understanding you have a bowling ball and not crystal ball :p

AK71 said...

Hi Adarina,

Well, I am not a scientist and I am not an engineer but I do know that if I were a Japanese, I will still need a roof over my head and I will still buy stuff I need and want.

So, the Japanese people will still need to rent an apartment (well, most of them do) and go shopping in malls. ;p

Unknown said...

Hi AK,
Just started to learn about investment here. I see saizen started off with a negative eps and increasing its eps till now. What do you think is the intrinsic value of this share?

AK71 said...

Hi Mansred,

Welcome to my blog. :)

Intrinsic value is quite subjective, I would say. Depends on your valuation technique.

You might be interested in reading this: When to BUY, HOLD or SELL?

For REITs, often I just use the NAV/unit as a guage. Investing in REITs is similar to buying real estate. Saizen REIT's NAV is $1.12 per unit, iirc.

Unknown said...

Thanks for the advice AK. I see that saizen reit suspended its dividend payment during 2009. I have added this counter into my watchlist. Given the current price do you think it is a good buy?

AK71 said...

Hi Mansred,

Yikes! When did I give any advice? When? When? -.-"

I am not adding to my long position because I already have a sizeable exposure to this REIT. I don't know if Saizen REIT is a good buy now or not for you.

After looking at the numbers, are you convinced that this is a good investment at the current price? Only you have the answer. :)

Unknown said...

:). I will look into it. Not sure about many things as I just started but will continue to learn more. Thanks :)

AK71 said...

Hi Mansred,

We have to start somewhere but the important thing is that we take that first step and that is what you have done! Gambatte!

Search my blog for Saizen REIT and see if my views make any sense to you. You will also get a feel of the history and developments over the last few years.

Read what others have to say and, then, with your own research, you will be able to make an informed decision. :)

E H said...

Good reading for Saizen holders.

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