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Using debt to generate income.

Friday, May 30, 2014

I went for an evening walk earlier and during that one hour, I thought about many things. Well, that isn't unusual for me. I think too much, many tell me. One of the things I thought about was the issue of debt used in investments.

For example, how risky is an investment for which the debt is meant to fund? People always wonder how to measure risk properly and there are people who are paid to study and manage risks. I am not a professional in this area and I only have a very simple understanding of the matter.


One consideration which is probably universal is that of time. Time? Yup, time.

Basically, the longer a business investment makes me wait before I am rewarded, the riskier it is. The prospective returns will have to be much higher to compensate for this risk. So, if debt is used to fund an investment with a long gestation period, I would consider it risky and would require a much higher return to be interested.

If an investment would generate income very soon, then, the use of debt in such an instance could be considered to be less risky. In such an instance, I might be quite happy with a lower return on investment.

Another example of a question to ask is whether the benefits generated from the investment are sustainable. If the benefits generated from the investment are sustainable, then, the use of debt to magnify the benefits would make more sense.

Debt can be good or bad. It is too easy to say that we should avoid highly leveraged investments but we really should examine each leveraged entity closely and not generalise.

Related posts:
1. Don't think and grow rich.
2. Secret to avoiding financial ruin.
3. Get on top of your finances.
4. Snowballing towards bankruptcy.
5. Total Debt Servicing Ratio (TDSR).

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.

Free "e-book": Retiring before 60 is not a dream.

Tuesday, May 27, 2014

AK is a lazy fellow who is always thinking about retiring and how he doesn't want to have to work for money. 

So, when AK read a recent article on how most fellow Singaporeans who want to retire before age 60 are unable to do so, the blogging bug bit him.






The article appeared in CNA and in summary:

1. 
54% of Singaporeans would like to retire before 60 years old. Only 36% believe they are able to.

2. 

48% believe that they will have less than $2,000 a month at 60 years old.

3. 

More than 90% have savings.

4. 

56% have started to save for retirement.

Read the article here:
http://www.channelnewsasia.com/news/singapore/many-s-poreans-doubt-they/1122962.html




I believe more than half of the respondents have taken the very important first step and that is to save money for retirement. 

However, nowhere in the article was the word "investment" mentioned. 


There was also no mention of how we could use tools available to us to help grow our funds for retirement. 

Give us enough information to worry us but not give us the solutions? 

Read the article and see if you can find the reason why.







Anyway, as this is a topic I have blogged about frequently, I decided to put together what could be 6 chapters in an e-book which could be useful to anyone who might be interested.

Chapter 1.
Be prudent when it comes to expenses, especially the big ticket items. 

Do we need to stay in a condominium? 

Do we need that car? 

Do we need to send our children to universities overseas? 

We could seriously boost our efforts to save for retirement by having our feet firmly planted on the ground.

Read: Why a wealthy nation cannot afford to retire?




Chapter 2.

If we are saving specifically for retirement, use the SRS. 

Many people I know still do not believe in the SRS. 

I don't understand why.

Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer. Charlie Munger.

Read: A brief analysis of the SRS.






Chapter 3.
Time is required for compounding to do its magic.

I still believe that the CPF-SA is a relevant tool and that we should let time help us meet the minimum sum required. 

There are quite a few examples of people who have done this. 

It works.

Read: Securing risk free returns early for retirement.




Chapter 4.
Don't hold on to too much cash. 

We should put aside a meaningful sum of money every month as we save towards retirement but just leaving the money in a savings account is not a good idea. 

Inflation and paltry interest rates mean that our savings will shrink in real value.

Read: Have huge amount of savings and work till 70?






Chapter 5.

Get rich slowly and retire a millionaire. 

Put aside an emergency fund and invest the rest of our savings. 

Never depend on single income. Make investment to create a second source. Warren Buffett. 

Invest for income and that is what I have been doing.

Read: Retiring a millionaire is not a dream.




Chapter 6.
As we save money and build wealth for retirement, we should not forget to also protect our wealth.

Read: Millionaire or not, plan for retirement.

Unless severely disadvantaged, if we do the right things, there is no reason why we would not have enough money to retire comfortably in Singapore. 

We can do it!
--------------------------------------
You might also be interested in:
How to upsize $100K to $225K in 20 years?

(Published in August 2014)
An update on AK's CPF-SA.
(Published in January 2016)

Saizen REIT: Rewarding patient investors.

Monday, May 26, 2014

Today, a reader asked me at what price would I sell my investment in Saizen REIT. It was a difficult question for me to answer because I don't really have any intention to sell my investment in the REIT. Well, at least not now. For reasons I have shared before, I believe that this REIT is a sturdy investment for income.

A small apartment: 452 square feet in area.

Of course, I could consider selling if the valuation starts to look rich. However, with its current NAV/unit at $1.17, even at the high of 98c a unit touched today, Saizen REIT's units still look inexpensive. So, do I think that unit price will continue to go higher? I really do not know whether prices will continue to climb a wall of worries but I do know the value backing each unit.

I am also reasonably sure that the REIT will continue to do well, operationally and financially. Operationally, the REIT has a very good track record. Financially, its balance sheet is strong and with its loans being amortising in nature, everything else remaining equal, it will only become stronger.

Developments in Japan suggest that real estate in the country will do much better and Saizen REIT is a natural beneficiary. I would like to share a couple of articles here which I read in recent days:

"House prices are expected to continue rising in 2014, given that the government is expected to inject an additional stimulus package in the second half of this year. Moreover, Tokyo’s successful bid to host the 2020 Summer Olympics is expected to boost property demand and the construction sector over the next 7 years." Read article: here.

"The top five property markets in 2014 are Japan's Tokyo, China's Shanghai, Indonesia's Jakarta, Philippines' Manila and Australia's Sydney, PwC found.

"PwC said a huge spike in demand for Japanese property had propelled Tokyo to the top spot, following a five-year absence from the top rankings. The sudden increase in popularity is due to the government's radical economic stimulus plan, which has resulted in a flurry of purchases in anticipation of higher prices, PwC said.

"As well as Tokyo, secondary cities in Japan, including Osaka, Fukuoka and Sapporo are also proving popular." Read article: here.


Saizen REIT has almost 140 residential buildings in Japan. Out of these, 4 are in Tokyo, 11 are in Fukuoka and 35 are in Sapporo. Buying any of these buildings is likely to make a better investment than buying an investment property in Singapore now. However, the good news is that we do not have to raise funds to buy an entire building, we could own a share by being unit holders in Saizen REIT.

I believe that things are increasingly looking up for Saizen REIT and investors with enough patience will be rewarded in due course.

Related post:
Saizen REIT: Undervalued and possibly more so.

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?

Invest X Congress: AK's ticket is up for grabs.

I was just informed by the organisers that I have a complimentary ticket to Invest X Congress which is happening on 14 June (Saturday) and that I could give it away to anyone I want since I won't be in the audience. I could give it away to a lucky reader too, of course.

However, I thought about it for a while and I think it won't be fair to readers who bought tickets to the event if I were to give my ticket away for free. So, to be fair, this is what I have decided to do:

Hmmmm....

The early bird offer of $79.00 a ticket to the event has ended. However, if anyone is interested in attending the event and who has yet to buy a ticket could make a bid for my ticket. Minimum bid is $79.00. Just leave a comment here in my blog with your bid. The highest bid will get the ticket. (Er, please remember that the regular price is $99.00 a ticket. Don't go overboard.)

Depending on the response, I could close the bidding process really quickly or let it run for a week.

The money from the sale of this ticket will be donated to a charity of my choice and I shall furnish proof of this donation at a later date. This is in line with one of the objectives of the event and that is to be charitable.

Thank you and I look forward to seeing you at the event. Cheong ah!

Related posts:
1. Invest X Congress 2014.
2. AK is feeling excited about 14 June 14.


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