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There is no doubt that anyone who bought units of Saizen REIT about half a year ago when its warrants approached expiry would have done very well with some 45% capital gains (based on the current price of 18.8c per unit). We would also have collected a DPU of 0.63c which translates into a half year distribution yield of 4.85% if we had bought at 13c per unit.
I have been asked by quite a few people whether Saizen REIT is still a good buy. So, is it?
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| A street in Shinjuku at night. |
With the JPY having declined by some 17% since the last time I looked at it, Saizen's NAV/unit is probably closer to 25c/unit now. The REIT is flushed with cash from the exercise of its warrants last year and its gearing level is relatively low.
The rapid decline in the value of the JPY is a bug bear for investors who are after regular income. All else being equal, DPU would decline in S$ terms and at the exchange rate today, a DPU of 1.05c per year is a fair estimate. At 18.8c per unit, it would mean a distribution yield of some 5.59%.
Saizen REIT has acquired more residential buildings and is likely to continue to do so with its much stronger balance sheet. The type of residential buildings in Japan that Saizen REIT invests in are mostly selling at below replacement cost. Translation: they are good value for money.
There is a definite growing interest in real estate in Japan. Private investors from Europe, USA and China have been active investors. So, Saizen REIT's portfolio could see its value increase over time as its buildings are revalued. This could cancel out the effect of a declining JPY as it pushes up the NAV of the REIT.
As for distribution income, I would expect the management of Saizen REIT to employ some form of hedging strategy to protect DPU in S$ terms. This is necessary as Mr. Abe, the new Japanese Prime Minister, is determined to cheapen the JPY and to herald in an inflation target of 2% per annum for the country.
Over time, I expect DPU in S$ terms to be relatively stable although it could take a hit from the declining JPY in the next payout in March. In fact, DPU could increase in the longer run as Saizen REIT:
1. Embarks on more acquisitions.
2. Continues with share buy backs.
3. Has loans which are amortising in nature.
4. Negotiates for lower interests on new loans.
Fundamentally, Saizen REIT is still very much undervalued. Would I, therefore, say it is still a buy? Well, theoretically, it is. However, I would caution that compared to 13c per unit, the margin of safety that investors like to have is very much diminished now.
Know what you are buying, know the worth of it and decide if you are comfortable with the asking price.
Related posts:
1. Saizen REIT: Daily share buy backs.
2. Saizen REIT: 2H FY2012.
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3 comments:
Phillip Capital did a site visit of some properties owned by Saizen REIT in Japan:
The bulk of the residential units are small- (20-35 sq m) and medium- sized (35-50 sq m), which accounted for 87.7% of the total residential units (5,328). The remainder is familysized units (above 50 sq m). The tenant profile is mostly young working singles, double income with no kids (DINKs)
and students. The small- and medium- size units are largely in-line with the trend of late and low marriage, and low birth rates in Japan.
In terms of revenue distribution, the top five cities – Sapporo (23.6%), Kumamoto (24.2%), Hiroshima (12.5%), Sendai (11.2%) and Kitakyushu (8.5%) – contributed about 80% of the total gross revenue.
... bought three Tokyo properties last year to take the advantage of post-earthquake condition. As of now, the Tokyo properties contributed up to 3.7% of total gross revenue.
... there could be more upside surprises than expected as Bank of Japan may consider enormous asset purchases to meet the doubling of inflation target to 2%. If this is to materialize, residential prices are likely to climb up at a faster pace not just in Tokyo but also other cities.
In short, we do see value in residential market in terms of stable and resilient cash flow.
All things being equal, the weakening in yen is at the disadvantage to Saizen REIT even though the stock is traded in SGD. At this juncture, no hedging instrument is employed and will result in currency translation loss for converting DPU to SGD. Nevertheless, Saizen REIT has established the foreign exchange lines and may use it as a hedging toolkit when the need arises.
Full report:
Saizen REIT, 15 Jan 2013.
For those who are interested in Saizen, the price is now at $0.195 with a big jump on 25th Jan @ 3.7%.
and I wonder why...
Hi Ernest,
There is no accounting for Mr. Market's behaviour most of the time. ;)
What is more important to us investors is to know what we want out of an investment and what we would do in different circumstances. :)
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