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Saizen REIT: Sell the entire portfolio or find a larger partner.

Sunday, September 28, 2014

One of my more successful investments in the last few years is probably in Saizen REIT and regular readers who have followed the story would be quite familiar with it. So, I shan't repeat the narrative.

In the past issue of The EDGE, it was reported that a major investor in Saizen REIT is unhappy with the lack of growth in the REIT. Well, actually, the fact that Argyle Street Management (ASM) is unhappy isn't anything new and I blogged about my view in November last year.

Now, the CIO of ASM is suggesting that "we either sell the entire portfolio or find a much larger partner." There is quite a bit of frustration but it is probably justifiable.

This is because Saizen REIT's NAV/unit is $1.22 and it is trading at around 90c a unit. If all the REIT's properties were to be sold at valuation, shareholders would receive $1.22 a unit or a 35% gain from the current market price. So, if there should be a willing buyer, selling the entire portfolio at valuation makes sense.

In fact, I am inclined to believe that Saizen REIT's properties are worth much more since they managed to sell a property in May at 19% above book value and another one in August at 12.8% above book value. This suggests that the book values of the REIT's properties are rather conservative.

The REIT's NAV could be about $1.35 to $1.40 per unit. This means a potential capital gain of 50% to 55.5%. It is, however, I believe, harder to find a buyer for the entire portfolio at such high prices.

Well, whether or not the current managers of Saizen REIT are replaced, for me, is less important than how my investment in the REIT could be impacted.

I have examined before the sustainability of the current day DPU and, if I remember correctly, I said it should be sustainable for the next 8 years. Could we see the Japanese economy and currency strengthen in the next 8 years? I don't know but I do know that there is enough resources to maintain the current level of distributions for a few more years. Beyond that, I expect DPU to reduce, everything else remaining equal.

A DPU of 6.3c translates to a distribution yield of about 7% at a unit price of 90c. If I should be paid $1.22 per unit for my investment in the REIT, I would liken it to collecting many years of income distributions in advance which is not a bad thing. A bird in hand is worth two in the bushes, as the saying goes.

So, am I going to increase my exposure to the REIT? No. Why? Isn't it a good investment for income? I believe it is but my exposure to the REIT is already quite large and I estimate it to be some 12% or 13% of my entire portfolio. My only other two investments which are bigger are AIMS AMP Capital Industrial REIT and First REIT. I don't see any need to increase the weighting of any of these REITs in my portfolio.

What if I did not have any exposure? Well, if I should be happy being paid a 7% distribution yield buying into rather undervalued freehold Japanese residential real estate, I might initiate a long position. Then, all that is left for me to do is to wait.

Related posts:
1. Saizen REIT: Good investment for income?
2. Saizen REIT: Undervalued.
3. Saizen REIT: Is the dividend sustainable?


Handsome boy said...

Hi AK,

If you were to choose between Saizen REIT and Croesus Retail Trust at the moment, which one would you prefer to be vested in? And the reasons behind choosing either one of them?

Seeing as they are both REITs based in Japan, they seem quite similar to me except that CRT is currently yielding 9% at the current price.

AK71 said...

Hi Handsome,

Apart from the fact that both are Japanese, I don't think they are comparable. They are quite different.

I like both of them and I explained why in my blog. This is where you do a bit of work and search my blog for past blog posts on them. ;)

Unknown said...

Hi AK, I was wondering what exactly happened on 2fridays ago, when the share price drop by 5%to a low of 88cents. Thought there was some Mkt info that I was unaware off. I loaded a few more loads. Am betting that long term, the yen will strengthen relative to other currencies. In the short run, the yen needs to appreciate to reduce consumption and boost exports but in the long run, it will revert back to its level. Its a economic policy of Marshall Lerner (J curve). Up side is with this appreciation, nav will be higher, consumption wise I don't see any downside, cause real estate is something that if there's a inelastic supply of it in Tokyo.

AK71 said...

Hi Joshua,

Very difficult to explain Mr. Market's behaviour, is it not? ;p

Well, I can only hope that Abenomics gain traction and that things would pan out the way they have envisaged.

A weaker Yen is good for exports and will help inflate prices for imports. It is a matter of time that the economy picks up and consumers stop holding back on consumption. The economics is simple, it would seem, but the politics could be something else.

Anyway, if unit price should sink much lower, I would be sorely tempted to add to my long position. ;)

^_^ said...

if even Argyle Street Management (ASM) can't unlock value in this counter, the chances for retail investors is even more slim

overall a very good read, thanks

AK71 said...

Hi Felix,

My motivation for buying into Saizen REIT so many years ago was to buy cheap and to buy for an attractive passive income stream. So, it could stay undervalued for many years and it wouldn't really affect my investment thesis.

If the REIT's value should be unlocked by ASM, I would look at it as a bonus, a big one. :)

AK71 said...

Saizen Real Estate Investment Trust has declared a distribution of 3.10 Singapore cents per Unit for the six-month financial period ended 31 December 2014. This is the same as the distribution per Unit for the six-month financial period ended 30 June 2014. The decrease of 4.6% in the DPU for YTD Dec 2014 as compared to the DPU of 3.25 cents for the six-month financial period ended 31 December 2013 was mainly due to lower net property income, predominantly in the first quarter ended 30 September 2014 and the depreciation of the JPY against the S$.


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