2014 full year income from S-REITs.

For my investments in S-REITs, the biggest thing that happened this year was the reduction in exposure to Sabana REIT.

Some might remember that I first invested in Sabana REIT in March 2011 at 92.5c a unit. As its unit price declined to under 90c, I bought more. It became one of my top two investments in S-REITs for about three years, delivering a distribution yield on cost of about 10% during that time.

I actually started reducing my investment in Sabana REIT in late 2013 and not this year as I started to build a larger position in Croesus Retail Trust then. I chose to reduce my investment in Sabana REIT instead of AIMS AMP Capital Industrial REIT because I felt that the latter was doing a better job of building value for unit holders as an industrial properties S-REIT.

After the major divestment of Sabana REIT early this year, my remaining exposure to the REIT is barely 10% of what it was at its peak. Now, my top three investments in S-REITs are:

1. AIMS AMP Capital Industrial REIT.
2. First REIT.
3. Saizen REIT.

AIMS AMP Capital Industrial REIT's Mr. George Wang constantly adds to his investment in the REIT, aligning his interests with those of minority shareholders'. The management have shown themselves to be capable in creating value for unit holders in their exploitation of existing properties' plot ratios. They have also improved the financial resilience of the REIT by securing other forms of funding and in strengthening its debt maturity profile.

This year, I took part in AIMS AMP Capital Industrial REIT's rights issue and sold the rights units for a profit some time later. Although the REIT has been doing well, it is my single largest investment in the S-REITs universe and I want to keep my exposure to a level I am more comfortable with.

In January this year, I wrote a blog titled "A simple way to a double digit yielding portfolio". It was an account of my journey as an investor with First REIT, more or less. First REIT is another example of how a REIT, if properly managed, could be a very good investment for both income and growth. It is also a REIT in which the CEO constantly puts more of his own money in.

With its DPU growing while its balance sheet stays relatively strong, my blog post titled "First REIT: This one is for keeps." in March 2010 could turn out to be quite prophetic. As long as the management continues to be prudent and as long as there is stability and a gradual pace of growing prosperity in the economies of Singapore and Indonesia, the REIT should continue to deliver good results.

Saizen REIT, my third largest investment in the S-REIT universe, has been a very rewarding investment so far. It seems to be a more complicated investment in more ways than one and as an income investor, the fact that it receives income in JPY and pays its investors in S$ is something we must consider.

The weakness in the JPY is definitely a concern. Although the downside can be hedged, it is not cheap to do so. So, realistically, I would expect some decline in future income distributions in S$ terms as the BOJ continues to expand money supply. Whether Prime Minister Abe's QQE will work or not is still a matter of contention but a weaker JPY is the new reality.

However, Saizen REIT remains a strong value proposition and the fact that a substantial shareholder has been fighting to unlock its value is proof of this. I have said time and time again that patience will be rewarded for investors of Saizen REIT's. I am sure it is beginning to sound rather tired but I will say it again. Patience will be rewarded.

For both First REIT and Saizen REIT, I have not done anything to add or reduce exposure this year. I have simply sat back, relaxed and collected income from them.

So, what did I buy this year in the S-REITs universe? I nibbled at Soilbuild Business Space Trust in August. It was a nibble because I thought it was a fair price but not undervalued. I rather like the numbers and the management seem to be competent. For those who have not read my blog post on the REIT and why I decided to buy some, please see related post no. 6.

I also have investments in the following S-REITs:

A. Keppel REIT
B. Frasers Commercial Trust
C. Lippo Malls Retail Trust
D. Cambridge Industrial Trust
E. Suntec REIT
F. Cache Logistics Trust

These are largely legacy positions or what are left after I reduced my investments in these REITs in a big way. My investment in Sabana REIT should rightly join their ranks.

With income from Sabana REIT significantly reduced this year and the fact that it was one of my largest investments in S-REITs, 2014 full year income from S-REITs has reduced drastically.

Total income received from S-REITs in 2014:
S$ 88,476.22

Although this gives me some $7,373.02 of income per month, this is a more than 25% reduction from what was received in 2013 last year. This is a significant reduction, no matter how we slice it.

Some might wonder what is AK the income investor to do? Well, I have been increasing my exposure to some other investments to make up for the shortfall in income. I might have to talk to myself in another blog post regarding these investments.

Related posts:
1. 2013 full year income from S-REITs.
2. Added Croesus Retail Trust and reduced Sabana REIT.
3. AIMS AMP Capital Industrial REIT: 7 for 40.
4. A simple way to a double digit yielding portfolio.
5. Saizen REIT: Rewarding patient investors.
6. Soilbuild REIT: A nibble.

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

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?

Saizen REIT: Still a good investment for income?

Saizen REIT is now one of my top 3 investments in S-REITs and in a recent talk, I said the same thing. I also explained why I invested in Saizen REIT and why I quadrupled my long position in the REIT when I did.

Anyway, Saizen REIT's latest presentation is now available for viewing and I have attached the link: here.

DPU: 3.1c.

While I believe that the weakness in the Japanese Yen is likely to continue for many more years, residential properties' occupancy and rental rates should start to pick up in the next couple of years if Abenomics gain even more traction.

Having said this, remember that Saizen REIT is distributing income in an amount that pretends that its loans are non-amortising in nature. What is the effect? Amortisation of loans cost 1.46c per unit which means if the REIT did not have the cash resources to pay for this and if the money were taken from income generated by the REIT's portfolio of properties, only 1.64c would have been available for distribution to unit holders this time.

See related post #1 at the end of this blog post.

NAV/unit: $1.22

In JPY terms, the valuation of properties in the REIT's portfolio seems to be rising and in one of my earlier blog posts, I shared that Saizen REIT's real estate assets could be more undervalued than we think.

See related post #2 at the end of this blog post.

Gearing: 37%.

Although Saizen REIT published their net gearing as 31%, I will take 37% for a more conservative guidance. I also want to remind myself that Saizen REIT uses its cash resources to offset amortisation cost. See earlier point on DPU above.

Weighted Average Loan Interest Rate: Less than 3%.

Debt profile: Earliest loan maturity in 2020.

Unlike most other S-REITs, Saizen REIT is able to secure loans with relatively long tenures which makes a lot of sense since real estate investment is essentially a long term commitment. The inability to refinance when loans mature was a reason why many S-REITs were caught in a bind during the GFC only a few years ago. Some of Saizen REIT's loans actually only mature in years falling in between 2031 to 2044.

Occupancy: 91%

There is still room to bump up income by getting more tenants but this would really depend on whether the Japanese economy improves meaningfully but with plans to allow more foreigners to join the economy, things could start looking up.

See related posts #3 and #4 to hear me talk to myself a bit more about the REIT. For me, Saizen REIT is still a great investment for income.

Related posts:
1. Saizen REIT: Is the DPU sustainable?
2. Undervalued and possibly more so.
3. Rewarding patient investors.
4. Saizen REIT: A foreign talent.

Accordia Golf Trust: At what price is it a BUY?

Some readers asked me at what price would I be interested in Accordia Golf Trust since I have said that I was not willing to pay the IPO price of 97c a unit, believing that it did not represent good value for money although it promised a 7% distribution yield.

Some asked me if they should start buying once the unit price goes under the NAV per unit of 92c because with its IPO in Singapore just 0.7x subscribed, it could see unit price sinking quite rapidly on the first day of trading.

Of course, I almost never give a clear answer to questions like this.




However, I will say that although it could be nice to buy something below its NAV, when we are investing for income, we really want to see whether the level of income that is being generated is attractive enough and how much of that promised income to be distributed is sustainable.

To do this, I looked into the Trust's gearing. The first observation is the very high gearing level of about 53%. That is similar to Croesus Retail Trust's current gearing level and yet Accordia Golf Trust could only promise a distribution yield of 7%.

Next, I looked at the way its debt has been structured. Long term debt really consists of three term loans of JPY 15 billion each.

The first term loan is for 3 years and the cost? 1.25% +
The second term loan is for 4 years. 1.5% +
The third term loan is for 5 years. 1.75% +

What is that "+" for? Cost of debt is actually a base percentage + the 6 months JPY TIBOR. If you don't know what TIBOR is, it stands for Tokyo Interbank Offered Rate which is forecast to be about 0.3%.

I feel that the TIBOR is likely to stay low for some time as Prime Minister Abe keeps borrowing costs low to encourage economic growth and works towards a targeted sustainable inflation rate of 2% per annum for the country. So, there could be some comfort there despite the high gearing level.

Just like Saizen REIT's loans, the term loans here are amortising in nature. Per term loan, the Trust has to pay JPY 75 million half yearly starting 31 March 2015. This means JPY 75 million x 6 in a year starting 31 March 2015. Per year: JPY 450 million.

On top of this, interest payment if estimated on the high side using 2% is about JPY 0.9 billion or 900 million

With total annual comprehensive income at almost JPY 6 billion, yearly debt repayment will be about 22% of annual comprehensive income from March 2015 to July 2017. In August 2017, the 3 year term loan will have to be fully paid.

Of course, by then, let us hope that the Trust would have found some way of refinancing since it would probably be impossible for them to pay off the remaining JPY 13.6 billion or so in the first term loan using internal resources.

Accordia Golf Trust's guidance is to pay out 90% of its income to unit holders from the 2nd year onwards but what is the distributable income available then? Ah! That is a question people might not have asked as they simply assumed that it would be 90% of the first year's DPU.

At the exchange rate of S$12.20 to JPY 1,000, assuming an annual comprehensive income of S$73.2 million and almost 1.1 billion units in issue, we would get a DPU of 6.65c if 100% of income is distributed to unit holders. If we should expect that only 78% of comprehensive income would be available for distribution from March 2015, then, DPU falls to 5.2c. If we still want that 7% yield, then, unit price has to fall to 74c which is a 24% decline from the IPO price.

Now, if only 90% is to be distributed, DPU could be as low as 5.2c x .9 or 4.68c.

So, at what price would I be interested in initiating a long position in Accordia Golf Trust? Let me talk to my bowling ball and I hope it is in a talkative mood.

Related post:
Accordia Golf Trust: 7% distribution yield.

Saizen REIT: A foreign talent!

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.

Saizen REIT: Rewarding patient investors.

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.

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?

Apartments with rental yields of 4.95% to 7.3%.

In the INVEST section of The Sunday Times, it was reported that more Singaporean investors are feeling bullish about investing in Japanese real estate. 

One agent who is marketing Japanese residential properties said that he would not have expected the craze he is seeing now when he started just a year ago.

It seems that local banks are also jumping onto the bandwagon as UOB and OCBC now provide loans to Singaporeans for purchases of Japanese real estate for up to 70% of the property's value. A year ago, only Bank of China was providing such loans.

Someone who bought a 275 sq ft studio apartment in Tokyo last year for $400,000 is very pleased that he did so. Apparently, similar apartments now go for some 9% higher in price.

I believe in investing in real estate for income. So, what I would like to know is how much is such a property able to generate in rental income. It was not reported in the article.

A search online shows that similar properties in central Tokyo could fetch some $1,800 a month in rent which gives a gross yield of 5.4% per annum. Not bad.

So, am I interested in buying an apartment in Japan now for rental income? Well, apart from the fact that prices are a bit higher now which means that the gross yield for the same 275 sq ft apartment is probably lower now in the region of 4.95%, everything else remaining equal, I am also not comfortable with the idea of plonking so much money in one single property in a country which arguably I am less familiar with than Singapore.

If we were to take a loan for 70% of the value of the property (current value being $436,000), we would still have to fork out $130,800, not including other costs related to the transaction. This is quite a bit of money for most average Singaporeans.

Of course, the beauty of this arrangement is leverage. Taking a 70% loan would mean amplifying the rental yield by more than 200%. So, the gross yield on cost, based on current prices of similar properties, could be above 10%. 

Another attraction of such a purchase is the possibility of selling the property for capital gains in future.

If we are pretty risk averse and would buy such properties without taking any loans, I believe that becoming unit holders in Saizen REIT would make more sense.

1. Buying into Saizen REIT means buying into a portfolio of more than 130 residential buildings (not individual apartments) across Japan which reduces concentration risk.

2. Buying into Saizen REIT means buying these residential buildings at a hefty 20% discount to valuation. I do not think we will be able to buy an apartment in Japan at 20% below valuation.

3. Buying into Saizen REIT means getting a 7.3% distribution yield with current unit price at about 88c. This could reduce to 5.7% if cash of up to 20c per unit were to be returned to unit holders. (Read related post number 1 below.)

4. Buying into Saizen REIT means having a team of managers take care of our properties and we don't have to worry ourselves with work such as rental collection, hedging against foreign exchange risk (if at all possible) and the repatriation of funds.

For someone who is investing for income, who does not wish to take on too much risk and who rather not have too much work in being a landlord, given a choice, investing in Saizen REIT seems like a pretty good idea compared to buying a single apartment in Japan.

Related posts:
1. Is the half yearly DPU of 3.25c sustainable?
2. Below valuation and replacement cost.
3. Fukushima and investing in Japanese real estate.

Saizen REIT and Croesus Retail Trust: Much ado about Yen.

A reader sent me an email and expressed worry that the JPY might weaken further against the S$. With exposure to Saizen REIT and Croesus Retail Trust, he is worried.

For sure, the JPY has weakened dramatically in the last 2 years (and a few months) against the S$. By now, it has weakened some 25% or so. It might weaken further or it might not. I am sure there are arguments made in favour of both cases.

I think, as investors, we have to know clearly what is our motivation for investing in Saizen REIT and Croesus Retail Trust. If we are investing for income and if we have not overpaid in either case, I feel that we have little to worry about.

Luz Shinsaibashi, Osaka.

Both Saizen REIT and Croesus Retail Trust hedge exchange rate risk. So, even if the JPY were to weaken another 10% in the next six months, their next income distribution in S$ will barely be affected. Similarly, if the JPY were to appreciate significantly in the next six months, don't expect any big gain in DPU, everything else remaining equal.

Of course, the income distribution after the next could be hedged at an even lower exchange rate if the JPY is weaker by then. Yikes! Yes, this is one of the risks that comes with investing in anything that receives income in a foreign currency.

With Saizen REIT trading at 88c a unit and giving a DPU of about 6.5c, we are looking at a yield of 7.38%. Croesus Retail Trust is trading at about 89c and will offer an annualised DPU of about 9.3c, by my estimate, or a distribution yield of 10.44%, after its recent acquisitions. Double digit yield, anybody?

Of course, we have to remember that Saizen REIT has a much stronger balance sheet compared to Croesus Retail Trust and that they own different types of properties.

In the event that the JPY weakens another 5 or 10%, what would the impact be on the distributable income in S$ terms? Yield falls to 6.64% for Saizen REIT and to 9.45% for Croesus Retail Trust? Is that so unpalatable? Is that a catastrophe?

Photo of the Great Buddha in Kamakura I took on a trip in December 2011 when JPY was at its highest against the S$.

Investing for income is supposed to give us some measure of equanimity even if the equity market sails through a storm. If the slightest hint of choppy waters scares us to bits, we might want to look at our motivation for being invested again and also check to make sure that we have not invested with money we might need in the next few years.

There must be a reason for our fear. Find it.

Related posts:
1. Saizen REIT: Is the DPU sustainable?
2. Croesus Retail Trust: Recent acquisitions.
3. Motivations and methods in investing.
4. Be comfortable with being invested.

Saizen REIT: Is the half yearly DPU of 3.25c sustainable?

Saizen REIT has announced a slightly higher DPU of 3.25c compared to 6 months ago. Post consolidation, the DPU 6 months ago would be equivalent to 3.15c. This means DPU has gone up by some 3.17%. Income will be distributed to unit holders on 21 March 2014.

Unit price of Saizen REIT's closed at 92.5c. So, annualising 3.25c means a distribution yield of 7.03% per annum. This yield is quite attractive for freehold residential buildings in Japan.

I really do not have any major concerns with holding on to Saizen REIT as an investment for income. I believe it is a stable income generator in S$ terms even with the JPY at historic lows. After all, the REIT hedged the exchange rate risk at S$12.32 to JPY1,000. This is pretty darn low.

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. Sounds good? I think so.

The rest of the numbers, Saizen REIT has prepared very good presentation slides as usual and I am sure they are self explanatory. I am more interested in how more recent developments could impact DPU in future.

Remember that in November last year, Argyle Street Management, which holds 8.9% of the REIT asked for cash which the REIT was holding to be returned to unit holders? That amounted to JPY4.86 billion or more than S$60 million in cash at the time.

Now, if this were to happen, it would affect not just the NAV of the REIT but also its DPU. This is because Saizen REIT's loans are amortising in nature and why this is actually a good thing over the long run has been mentioned in this blog a few times before.

Amortisation or principal repayment should be from income generated by the REIT's properties. This is only logical. The REIT, however, uses its cash resources to effect this principal repayment which enables it to distribute more of the income generated by its properties to unit holders. Out of the half year DPU of 3.25c, this measure accounted for 1.19c or some 36.6% of DPU. This is significant.

Annual amortisation approximates JPY 633 million. So, this means that with the cash the REIT has in hand, it could continue to use its cash resources to effect principal repayments for almost 8 years which would help to maintain a higher DPU.

However, if the cash were to be returned to unit holders instead, then, we should expect DPU to decline to approximately 2c every 6 months or 4c a year. I would not expect unit price to stay at 90c then either. I would expect unit price to fall to the region of 70c a unit or a bit lesser and with a DPU of 4c, we would then be looking at a distribution yield of some 5.71%.


A distribution yield of 5.71% is still pretty good for the kind of assets the REIT owns, especially when the loans are amortising in nature. Of course, one has to remember that in such a scenario, existing unit holders would most probably have had received some 20c per unit in "special dividend" too. This is not bad at all especially if we got in at the lows.

Blogging about the results in this way is really to remind myself of what is the underlying reality in Saizen REIT's DPU and to prepare myself for change which could be on the way.

See slides: here.

Related posts:
1. Saizen REIT: DPU of 0.63c.
2. Saizen REIT: A special dividend?

Buy a property below valuation AND replacement cost!

Someone asked me why I don't consider buying new built Japanese apartments for investment since I feel that a reflation is underway in the country.

Why Saizen REIT?

The value of the residential properties owned by Saizen REIT is below their replacement cost.

Buying at a discount to valuation is great but buying at below replacement cost is even better! When I invest in Saizen REIT now, I am buying at a discount to valuation buildings which are valued below replacement cost! How crazy is that?

Want to compete with Saizen REIT and other incumbents by building new similar apartment blocks? Must be bonkers to do so.

So, supply is not growing and demand seems like it could grow with Abenomics gaining traction. Things could look better in the next few years for Saizen REIT.

Related post:
Saizen REIT: Insiders are accumulating.

A strategy to grow wealth and augment income (2013).

I am primarily investing for income and in my last blog post, in what has become a yearly practice, I revealed my full year income from S-REITs as well as how they fit into my investment strategy. They are relevant to income investors but with the spectre of rising interest rates in the years ahead as well as a peaking in the real estate cycle here, it is sensible not to be overly optimistic about S-REITs in general.

So, apart from a large purchase made in Saizen REIT in the middle of 2012, I have devoted most of my resources to stocks. These should be undervalued and are likely to continue growing for years to come. Since I want to have income from my investments, I would also like for these stocks to pay dividends.

Marco Polo Marine's yard in Batam.

Now, with these stocks, the main strategy is to buy and hold. However, I am not averse to trading around my investments. So, I could divest partially or fully if it is a good idea to do so. For 9M 2013, I revealed that I locked in gains of S$188,625.13. Has the number changed?

Well, I mentioned that I partially divested my investment in Sabana REIT last month. This added S$12,860.03 to gains from trading in 2013.

So, total trading gains in 2013 is S$201,485.16.

What about adding to my long positions?

What I hope to do primarily is to identify good companies, initiate long positions in them at fairly good prices and then wait to add to these positions if there should be bad news which send their share prices down. These are companies which I am comfortable to stay invested in for years, knowing that they possess some competitive advantages which differentiate them.

Warren Buffett famously said that we should invest with the thought that the stock market could close the next day and not reopen for five years. What does this mean?

Invest in stocks of companies which we are confident will do better over the next five years. We wouldn't be bothered by any volatility in their stock prices in the meantime unless it is to add to our long positions with greater margins of safety. If we understand this, we will know what stocks to avoid. How? Do an inversion.


With this in mind, in the last three months, I added to my long positions in NeraTel and Yongnam as their share prices declined due to bad news which I believe are neither long term nor recurring in nature. I have received fairly good dividends from these stocks and I also made some money trading these stocks earlier in the year.

I also added to my long position in SPH. I was paid both the special dividend and the year end dividend for this as well.

Marco Polo Marine is still my single largest investment although its share price has not declined significantly enough for me to add to my long position. The much higher dividend per share paid out recently was a bonus.

I also retain long positions in CapitaMalls Asia and Wilmar International. These are strong companies and leaders in their fields. They are likely to do better in future.

So, was anything new added to my portfolio?

I initiated a long position in Croesus Retail Trust and even added to this position by using funds freed from a partial divestment of Sabana REIT.

Wait a minute? Didn't I say that I am wary of rising interest rates and a possible peaking of the real estate cycle? Yes, I did but Croesus Retail Trust owns malls in Japan and the BOJ is bent on keeping interest rates really low. Abenomics demand this. The Trust has a relatively low cost of debt which is locked in for 5 years.

Luz Shinsaibashi.

Japan has also suffered from continual deflation for 20 years. If anything, the real estate cycle should have a greater chance of bottoming than peaking. Anecdotal evidence tells of a recovering real estate market in recent months that is likely to pick up speed in future.

Although my strategy, with a generous dose of luck, has worked well this year, I can only hope that it will continue to work in the new year.

To grow wealth and augment income? Yes, indeed, that is the plan.

Related posts:
1. 2013 full year income from S-REITs.
2. Yongnam: Substantial shareholder increased stake.
3. NeraTel: Added to my long position.
4. Marco Polo Marine: Exciting times ahead.

2013 full year income from S-REITs.

On 15 September 2013, when I reported 9M income from my investments in S-REITs, I mentioned that full year 2013 will probably see lower income compared to full year 2012. 

This is mainly because I sold approximately half of my investment in LMIR (Lippo Malls) earlier this year and I have not made any substantial acquisitions in S-REITs since.

Please read:
LMIR: Divested 42.5% at 52.5c.

In fact, I recently divested about a quarter of my position in Sabana REIT as I moved funds into Croesus Retail Trust. Wondering why I did this?

Please read:
Added Croesus Retail Trust and reduced Sabana REIT.

Luz Shinsaibashi.
Taken with my little IXUS from my hotel room using 32x zoom!

For reasons I mentioned in my blog post of 15 September 2013, I will continue to be very cautious in adding to my positions in S-REITs. Definitely, if I feel that they are undervalued, I would buy more. Could this happen? Of course it could. Remember Saizen REIT in the middle of last year when its warrants were set to expire?

Please read:
Saizen REIT: Why did I buy? Would I buy more?

We might also get a hint that a REIT is undervalued if insiders suddenly become active in buying too. This happened with AIMS AMP Capital Industrial REIT earlier this year when its unit price declined enough to offer an approximately 10% discount to NAV.

Please read:
AIMS AMP Capital Industrial REIT: Nibbling with George Wang.

There could be opportunities for relatively compelling buys again in future. If they should present themselves, I hope I am lucky enough to spot them and brave enough to buy some. Until then, my portfolio of S-REITs might not grow.

Although it would be nice to grow my income from S-REITs, it should not be growth at all costs.

An apartment building in Japan.

So, my strategy for S-REITs is to stay largely invested for income while waiting for Mr. Market to make me offers I cannot refuse. This way, my war chest continues to grow and I will have the resources to do business with Mr. Market when he suffers from manic depression which he does from time to time.

So, what is my full year 2013 income from S-REITs?

Total: S$ 118,081.02

This is some 2% lower than the year before and I expect income from my portfolio of S-REITs in 2014 to be at least marginally lower due to the partial divestment in Sabana REIT this quarter.

Related posts:
1. 9M 2013 income from S-REITs and more.
2. 2012 full year income from S-REITs.

Saizen REIT: A special dividend?

Argyle Street Management, which holds 8.9% of the REIT, said the REIT had 4.86 billion yen (S$61 m) of cash. That figure amounts to 23.5% of the REIT’s market capitalisation as at 29 October 2013. Argyle wants the REIT’s manager, Japan Residential Assets Manager (JRAM), to consider distributing a significant portion of its cash balance to shareholders through a special dividend.
(Source: The Business Times)

Regular readers know that I like Saizen REIT. I got interested in it during the GFC when it was unloved and I have been blogging about it ever since the early days of ASSI. Some might even say that I know the REIT like a friend. Although friends don't give us money regularly, this one does and if Argyle gets its way, I could be getting a bit more.

What do I think of the proposed special dividend?

Well, if it happens, it is a return of capital. Why do I say this? This is not from higher income or earnings. This is to have excess capital returned to unit holders if the REIT's management is unable to find better use for the money.

Actually, for anyone who has been following developments at the REIT, the management had used the money to buy back units from the open market and made a few DPU accretive purchases as well. I like their cautious approach as they don't seem to be buying buildings indiscriminately. Going on a shopping spree would, of course, fatten their pay checks. It is to their credit that they did not do so.

If a capital reduction exercise should happen, Saizen REIT would have less money on hand for any potential DPU accretive purchases. This means that the management would have to use a blend of equity and debt to fund such purchases in future. So, it would be back to square one for unit holders.

However, I should not complain if I am going to be paid money, should I? Better in my bank account than others' or so some would say.

One reason why I am invested in the REIT is because it is grossly undervalued. Depending on the exchange rate we use for the JPY to S$, the REIT was trading at a 20% to 25% discount for much of  2013.

The warrants exercised in the middle of 2012 strengthened the balance sheet of the REIT considerably. The REIT, already undervalued then by some 40%, was made more so because of that.

So, for those who exercised their Saizen REIT warrants back then, they would be taking back some of their own money if a return of capital should happen.

For those who bought into the REIT at a relatively large discount to valuation and who had no warrants to exercise before they expired, they should be grinning broadly as they would be taking some of other people's money with a margin of safety to boot.

Having said this, special dividend or not, Saizen REIT has been a good investment for me and it is likely to get better in the years ahead if Mr. Abe's policies gain traction.

Related posts:
1. Fukushima and investing in Japanese real estate.
2. Saizen REIT: Risk free rate and unit price.
3. 9M 2013 income from S-REITs and more.

Fukushima and investing in Japanese real estate.

I have real estate investments in Japan through Saizen REIT. So, naturally, I am concerned about whether there is any progress made at the Fukushima nuclear power facility.

Prime Minister Shinzo Abe seems to be doing all the right things to kick start an economy that has been in deflation for 20 years. He has also openly asked for help from the international community to help manage the problematic Fukushima power plant. Is a solution close at hand?


Radioactivity levels at Japan's Fukushima nuclear power plant on Thursday were 6,500 times higher than the previous day's readings. 19 October 2013.

The situation does not seem to have improved.

Although Saizen REIT does not have buildings within a 20km radius of the power plant, the nearest being 60km away in Koriyama and 100km away in Sendai, the inability of Japan to handle the problem in an effective manner raises pertinent questions since earthquakes are likely to occur again. If nuclear plants in other parts of Japan should face the same problem in future, what then?

Having said this, if we believe that the Japanese economy is turning around and if we want to invest in Japanese residential real estate, it would make more sense to invest in a REIT than to invest in specific properties in Japan. This will lower the risk of a total loss due to natural calamities.

Related posts:
1. Saizen REIT: Sendai, Koriyama and Morioka.
2. Invest in Japanese real estate.
3. December 2011 in Japan: Hakone.

9M 2013 income from S-REITs and more.

Three more months to the end of the year. Lots of things have happened in the first 9 months of the year. I want to zoom in on the investment front and record some of my thoughts.

The strategy to be invested in S-REITs for income is still working. Of course, with the spectre of the Fed cutting back on QE and a possible increase in interest rates in the next 2 or 3 years, Mr. Market has turned cautious on leveraged investments like S-REITs. This is only natural. Unit prices of S-REITs have become more realistic as a result.

When Mr. Market is pessimistic, that is when we are likely to get good deals. As to what is a good deal, I am sure this is rather subjective. Every person would have a different idea of what is an acceptable margin of safety. Every person would have a different perception of a REIT's prospects.

Having built up a relatively large portfolio of S-REITs, I devoted more resources to investing in what I believe are undervalued stocks, something which I continue to do in 2013.

So, essentially, what I have done is to keep what has worked well for me thus far while expanding my investments in certain companies, recognising possibly more difficult times ahead for S-REITs. 

This is an approach that requires more work than simply getting passive income from S-REITs but the time when it was a no-brainer to buy and hold S-REITs probably ended sometime in the second half of 2012.

For 9M 2013, how much did I receive in passive income from S-REITs? 

$92,872.65

Full year 2013 income from S-REITs is most likely going to be lower compared to 2012 because I sold a significant portion of my investment in LMIR earlier this year and also because Saizen REIT distributes income half yearly (i.e. there is no income distribution in December from Saizen REIT).

Also, we might want to bear in mind that, although hedged, the weaker Indonesian Rupiah and Japanese Yen could result in lower income distributions in S$ terms for unit holders of these REITs in the year 2014.

With twice as much industrial space being scheduled for completion in 2014 and 2015 than any single year in the past decade, the possibility of stagnating or even a reduction in income for industrial S-REITs in future cannot be discounted. This is why looking at WALE (Weighted Average Lease Expiry) of industrial S-REITs is more important now.

Although I would have liked nothing better than to sit back and collect passive income regularly from S-REITs, doing very little else, I decided to move out of my comfort zone. For sure, there were bumps along the way but my efforts have generally been rewarding thus far. 

What did I do?

I increased my investments in stocks which are likely to be dependable passive income generators such as SPH and NeraTel. 

I also hold long positions in stocks which I believe would benefit from the Chinese consumption story such as CapitaMalls Asia, PCRT and Wilmar. 

Any dividend from investing in these stocks and any gain from trading would go towards cushioning the possible decline in income from S-REITs in future.

Up to 15 September 2013, the total gain from trading this year amounts to: 

$188,625.13

It was fortuitous the way the China Minzhong saga turned out. It preserved my trading gains and grew it rather significantly at the same time. Apart from my long position in Wilmar, all other investments are in the black. 

So, what is my plan for the future? 

Nothing profound really. 

If prices were to decline much more, I hope I would be brave enough to buy more. If prices were to rise much more, I hope I would remember to sell some.

The grand scheme is to augment and not to replace my passive income portfolio. 

For sure, it doesn't mean that I think S-REITs are going the way of the Dodo. Indeed, they are still good investments for income at the right prices. For me, passive income from S-REITs will still be an important pillar in achieving financial freedom. This is unlikely to change in the foreseeable future.

Remember, this blog is not meant to instruct but if anyone finds it inspiring, I will be happy enough.

Related posts:
1. 2012 full year income from S-REITs.
2. Never lose money in real estate and S-REITs?
3. Do not love unless it is worth the loving.
4. Motivations and methods in investing.
5. Be cautious climbing the S-REIT tree.
6. Be comfortable with being invested.

Saizen REIT: Risk free rate and unit price.

This blog post is a response to a comment from Solidcore. See his comment: here.

I am adding to his comment by saying that although understanding our motivations is important in our investment efforts, we have to remember that, alone, it is not enough for us to make sound decisions, of course.

If we believe the news, a 10 year US Treasury will have a risk free rate of 3.5% eventually. This is, however, unlikely to happen rapidly in the near future. Why? The USA is, at best, emerging from its problems and we see Europe and Japan still doing their own QEs with no sign of stopping.

So, if we are after distribution yields from S-REITs, having lower unit prices, everything else remaining equal, is good for us. This is easy enough to understand. However, at the same time, given the realities and the possibilities of the day, we want to avoid capital loss as well. How do we manage this?

For example, Saizen REIT's DPU, using their forward currency hedge rate as a guide, is likely to provide a DPU of 1.1c per annum. 10 year US Treasury now has a yield of 2.7%, if I remember correctly. It was a percentage point lower not so long ago.

So, it follows that Saizen REIT would have to provide another 1% in distribution yield to make itself an attractive investment for income. It will find this harder to achieve since its DPU will decline in S$ terms due to a weaker JPY. Of course, the REIT could have DPU accretive acquisitions in the next few months which is why analysts are saying if we want to invest in REITs, invest in those with room to grow their income distributions. More accurately, invest in those which could grow their DPUs.

All in all, a back of the envelope calculation tells me that Mr. Market would likely be more enthusiastic about Saizen REIT if it should offer a 7.5% distribution yield with risk free rate rising to 3.5%. With DPU estimated at 1.1c, this gives us a target unit price of 14.7c. Isn't that a shocker?

Well, it doesn't mean that we cannot buy at 17.7c, 16.7c or 15.7c. After all, 14.7c might not see the light of day. 14.7c is a number I concocted, after all. Mr. Market doesn't listen to me, does he? For example, I told myself in an earlier blog post that MIIF, post APTT IPO, would only be worth buying at 14c but see what happened recently? ;p

To add, Saizen REIT's loans are all domestically arranged and with BOJ bent on keeping interest rates low, the REIT's cost of debt will remain relatively low. This is demonstrated by the REIT's recent refinancing activity which has lowered its cost of debt. So, there will be some resilience in the REIT's future income distributions.

Such exercises prepare us for what could be the downside potential of our investments. This is also something we have to be comfortable with. So, if we had bought at 17.7c for the projected 1.1c in annual DPU, how would we feel if unit price were to fall to 14.7c? If we are uncomfortable with the downside potential, then, most probably, we are investing with money we cannot afford to lose.

Related posts:
1. Motivations and methods in investing.
2. Saizen REIT: DPU of 0.63c.