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?

FCOT: Distribution Reinvestment Plan (DRP).

Received another DRP offer and this time it is from Frasers Commercial Trust (FCOT). This is probably not going to see any take up because the price of $1.2389 per new unit to be allotted is higher than what we could get from Mr. Market now which is $1.235 per unit.

It is probably good to be reminded that the headwinds for REITs could get stronger and if we want to invest in REITs, we have to recognise this. One of these headwinds is an environment of rising interest rates.

So, the DRPs which S-REITs are pushing out now make sense because, if taken up, they will lead to lower gearing levels. The REITs could pay down their debt with the funds as well when they fall due. This is probably a good thing for unit holders too.

To me, it only makes sense to take part in DRPs if we want to increase our long positions in the REITs concerned. However, with rising risk free rates, unit prices of S-REITs will continue to experience downward pressure, everything else remaining equal. So, to me, it doesn't seem very prudent to take part in DRPs at this point in time or in the near future.

I am not against others taking part in the DRPs to strengthen the balance sheets of the S-REITs I am invested in, however. In the meantime, I am quite happy to continue receiving income from these S-REITs and possibly increasing my investments in them only when Mr. Market makes offers too attractive to ignore.

Related posts:
1. Distribution Reinvestment Plan: First REIT and CIT.
2. AIMS AMP Capital Industrial REIT: DRP.