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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.


Steven said...

Hi AK,

Congrats and look forward to your first public appearance and speech soon :) Although i wouldnt be there...but i am sure i will be able to read you blogging on it soon.

Quoted from your article,
"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."

At what price would be decent to consider divesting, 20% above NAV at $1.40? 30% above NAV at $1.64? Or 50% above NAV at $1.76? Knowing everyone's "decent" price to divest is different of course.

What factors would be useful to consider when divesting a REIT such as Saizen? NAV? NPI? etc? Knowing this investment is for income generation purposes of course.

Best Regards,

AK71 said...

Hi Steven,

Instead of a generic question "At what price would you sell?", you have cornered me with this question. Thumbs up! :)

Actually, you have provided the answer in your question. Investing in Saizen REIT is for income. So, when would we divest? When we feel that the yield is no longer attractive. ;)

Distribution yield is a function of DPU and unit price. So, once you have an idea what is no longer an acceptable yield, you will know when you might want to sell. :)

As for the event, I won't be doing a review of it because I won't be in the audience and I will only be able to make an appearance during my segment. I understand that the organisers are trying to engage another blogger to do a review of the event. Actually, if this happens, it is better than having me do review. AK should not do a review of AK's presentation. LOL.

Steven said...

Hi AK,

You should do a personal review on your speech :) So we know what is going on in that bowling ball...

Generic questions are always replied with generic answers, correct? lol.

Your answers are as always, very enlightening. Yield sounds like a very good way to gauge, its a very fluid value. Very simple and easy to understand.

Will remember this, thanks.

Best Regards,

AK71 said...

Hi Steven,

Oh my. Why is everyone interested in my bowling ball? Maybe, I should put it up for auction. -.-"

As for that review, I am actually quite interested in what people might say about my presentation. It will help me decide whether this is something I should consider doing again in future. :)

raf said...

Would appreciate your estimate of Saizen's DPU for six months ending June 2014.

AK71 said...

Hi raf,

I did an estimate in an earlier blog post:

"The REIT will be hedging exchange rate risk again for the next six months but will employ a range this time. S$12.20 to S$13.12 : JPY1,000. Everything else remaining equal, it means that we could see DPU 6 months later either declining by 1% or rising by as much as 6.5% in S$ terms."


All in relation to a DPU of 3.25c. :)

Simple boy said...


I a newbie investor. Just want to check on your thoughts on the yield. You mentioned divest when yield is no longer attractive. Saizen yield seems to be around 6.7% for 2013. My working as follows :

Period : Distribution per unit (cents)

1 July 2013 - 31 December 2013 : 3.25 cts
1 January 2013 - 30 June 2013 : 0.63 cts

Total DPU = (0.63 x 5 for consolidation) + 3.25 = 6.4 cts. Compared to stock price of say 95 cts, this is 6.7% which I feel is a little low for REITs. Please share with me your insight on how you view this differently.

Thank you.

AK71 said...

Hi Simple Boy,

I will do a blog post on this topic this evening. Look out for it. :)

Banzai said...

Hi AK,

I am a complete newbie when it comes to investment in stocks. Would really appreciate if you could blog about what rights issues, warrants, conditional/unconditional offers for stocks.
I am completely lost when I am offered the above and don't really know what I should do.

Thank you so much and I have realy learned a lot from you about investment in reits and stock.

Bless you!

AK71 said...

Hi Banzai,

I am going to direct you to an online resource which I believe you will love: Investopedia. :)

To start you off is one article on Rights Issues:

And here is one on Warrants:

Happy reading. :)

Casey said...

Hi Ak71,

Wonder if you consider investing in Mapletree greater china commercial trust. while I am heavily invested in Saizen, i found that the MGCCT is equally attractive. The asset value is improving due to robust rental revision, where the gearing level is predicted to drop further. The yield is equally attractive at 7.2% and probably quite sustainable at least for the next 3 years. Festive walk is one of my favorite shopping mall in HK and the Beijing's office space supply for the next 3 years is still below the average annual demand...
Besides, although the properties have short land lease term, unlike Singapore, in HK and China, the lease renewal seems easier and more towards monetary issue than the land use strategical issue.
Hope that you can share your view here.

AK71 said...

Hi Casey,

I am not familiar with MGCCT but after taking a quick look at the numbers, it seems that its slightly lower gearing now as compared to what it was at IPO is due to revaluation of its properties upwards.

Still, at 38%, gearing is pretty high. This suggests to me that to grow DPU further, the Trust will have to gun for positive rental reversions. If the Trust should try to grow through yield accretive purchases, some form of equity fund raising is probably required.

There is probably a limit to how high rental could be pushed. So, there will be some acquisitions and, hence, fund raising at some time in the future. Investor in the Trust must be mentally prepared for this.

With a higher NAV of $1.05 per share, closing at 87c means that the Trust is now trading at a 17% discount to NAV. A gearing level of 38% and a distribution yield of 7.2% all suggest to me a fair valuation.

So, while it does not appear cheap, it does not come across as expensive either. :)

Casey said...

Thanks AK.

The Festive Walk is consistently improving its position to become one of the top malls in HK, unlike others, its location as a regional mall at Kowloon Tong is strengthening even further as it is tapping its competitive advantage in its location, reflected in the robust improvement in the number of visitors follows its repositioning to attracts more higher end tourist from Mainland. It was voted the top favorite mall in HK by in a polls conducted in Guangzhou. Its competitive advantage is very much positive right now, reflecting the success story of Vivocity. As per the Beijing office, I think the rental in Beijing is too much at the higher side, it is now significantly higher than those in Shanghai, due to the shortage of supply for the past two years, the MGCCT's office portfolio income has significantly lifted followed some phenomenon 70% increases of it rental during renewal. Is this sustainable? f the reports obtained from research are correct, Beijing is going to face shortage of office supply for another 3 more years due to the lower than average annual supply.
If I did not analyse it wrongly, MGCCT is going to be another star performer in reits sector for the next 2years just based on its organic grow. Like what MCT did, if I buy at this price now, I could expect a phenomenon growth of DPU of 20-30% in just first 2 years. Unlike MCT, the MGCCT is giving a baseline of very good 7.2% yield, if invested now.

Most of the acquisition done by any trusts or Reits these days did not show good result, I hardly believe that acquisition could be yield accretive in a big way without masking by financial engineering.

Comparing the future growth prospect MGCCT with other trust, unlike malls from other trust from Japan, which most owns mall that has weak positioning and locked in competition with even better positioned bigger mall in the same neighbourhood, the portfolio here seems very special at least for the next three years and an anticipated phemenon growth of DPU (unless the loan interest increase significantly)

Hope that you can share view, especially the down side of MGCCT that i might have overlooked.

AK71 said...

Hi Casey,

I will say that a preliminary look at the numbers shows that MGCCT is a fairly good investment at the current price.

When we invest for income, we have to ask where the income is coming from and whether it is sustainable.

For people who invest in REITs, the question of sustainability should be put on a pedestal.

I am not familiar with MGCCT. So, I am going to ask a few questions off the top of my head which might help to flesh out your analysis.

If there is no financial engineering involved, good. What about rental escalation? If it is built in, it will provide some earnings visibility.

Of course, there is a need to understand macroeconomics and the realities on the ground. This is more difficult.

If we believe that the real estate sector has grown somewhat bubbly in Hong Kong and China, then, how realistic are the valuations? There is also the matter of shadow banking in China. How bad is it and will it affect the real estate market?

With properties in Hong Kong and China, what about FOREX risks? Will this pose a risk to earnings in S$ terms?

What about the debt? Don't just look at the debt maturity profile but also check whether the loans are in the local currencies (i.e. HK$ and RMB) so that there is a natural hedge.

How short are the land leases and how well do we understand the Land Laws in Hong Kong and China. Is there a chance that the leases might not be renewed? How high is this chance?

With gearing as high as it is, how is the management planning to grow its portfolio? Is there a plan to scale back on income distribution to 90% to retain cash?

Is there any plan for acquisitions in the near future? Any ROFR properties? If there are, chances of a near term acquisition could be quite high.

Please share the results of your investigation with us. Thank you. :)

Casey said...

Hi Ak,

Thanks for the advice.

There is no build-in rental escalation, however, I am not particularly like the idea, unless it is CPI linked like the Preits. The build-in escalation like the one in FR and Cache is more of disadvantage to me as it is likely to be below the CPI.

The rental revision for festive walk would likely to be robust at 15-20%, however the rental in Beijing Gateway at Luthansa area is likely to be moderating to sub 30% mark due to increased office space supply.

At the cap rate of 4.5% and 6.5%, the valuation seems reasonable.

Yes, the forex risk cannot be ignored although it has a natural hedge against HKD.

At the current 7.2% yield. Unless something very drastic happen, else, I think it is still very positive.

I ever predict double digit DPU growth for Saizen, but it was 'sabotaged' by Abenomic... Hence, I cannot ignore the forex risk when come to foreign property REIT.

AK71 said...

Hi Casey,

Thanks for sharing your thoughts on MGCCT. I think I might put it on my watch list now. ;)

I agree that MGCCT at current price seems like a fair proposition. So, being me, I will probably wait a bit to see if Mr. Market is willing to offer a lower price to perhaps offer a prospective distribution yield of 8%.

8% was also the distribution yield that I demanded of PCRT before initiating a long position a couple of years ago to compensate for the risks that came with the investment.

There is nothing sacred about 8% and, for sure, MGCCT looks to me like a "safer" investment compared to PCRT apart from its much higher gearing level.

I just feel better when I get something at a price which is somewhat more than fair. ;p

raf said...

Interesting discussion. When investing in reits with foreign assets it is obviously important to consider forex effects. One other factor which also merits attention is the question of diversification. Should it not be considered a plus that by exposure to foreign assets and currencies (in stable countries)we avoid the risk of putting all eggs in one basket (spore).... unless we think of spore as an exception to the rule ( a belief that no harm can come to spore or its currency).

AK71 said...

Hi raf,

I agree that there are many more opportunities available outside Singapore. This frog is also trying to migrate from a small well to a bigger well. ;p

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