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Saizen REIT: Why did I buy and would I buy more?

There are so many ways to look at an event.  

Some might look at it positively and some might look at it negatively. 

Some might jump for joy and some might break out in cold sweat.

All of us have imperfect knowledge and what we think is reality very often is enough to push us into action. 

Of course, what we think is reality might not be reality and those who are eventually proven right might just have been lucky.






What is all this rambling leading to?

The recent weakness in Saizen REIT's unit price has been a source of concern or interest, depending on where we stand. 

Personally, I am not concerned. 

I am more interested. 

I also hope that I know Saizen REIT a bit better than most.

When I last blogged about Saizen REIT, its unit price had declined to 13.6c. 

That was already a 10% decline from its high of 15c a unit just a few weeks ago. 

In that blog post, I presented some numbers and asked that interested parties decide for themselves if 13.6c was a good enough entry price.

Well, I added to my long position yesterday at 12.8c to 13.1c a unit. 

Taking in the dilutive effect of the warrants, buying at these prices would give me distribution yields of 8.24% to 8.44%, all else remaining equal, which I believe to be rather attractive for freehold residential properties in Japan.

Some might even say that buying at these prices is similar to buying right after the triple disasters early last year when the REIT was sold down to 13c a unit. 

Is the REIT in a situation which is similar to last year's panic? 

Is a low of 12.7c per unit justified by worsening fundamentals? 

(This is really a rhetorical question since, often, there would be a mismatch between price and value.)





Well, the warrants outstanding, if fully exercised, would have a 12% dilutive effect on distribution yield, everything else remaining equal. 

However, the REIT is now without the problem it had with YK Shintoku back in early 2011. 

The REIT is currently in possession of a much stronger balance sheet and looks set to grow its DPU over time.

So, buying more of Saizen REIT now at 13c a unit has less uncertainty compared to buying at 13c in the aftermath of the triple disasters last year. 

Less uncertainty perhaps but what about value? 

Is buying at 13c now the same in value as buying at 13c back then?

The Palms Denenchofu, Tokyo. Acquired on 30 March 2012.

The NAV/unit now, taking into account the dilutive effect of the warrants would be 31c . 

This value, actually, has not changed since March 2011. 

Although it is good to know that we would still have the same value of asset backing each unit we purchase, we are really investing for income here and are not after discounted assets per se. 

What about its DPU?

With gearing, adjusted for warrants, reducing from 28.3% to 21%, the REIT has more resources to increase DPU through yield accretive purchases. 

Its DPU looks likely to be higher in future than not, all else remaining equal.

Would I buy more? 

I would continue to accumulate units of Saizen REIT next week if it should trade at 13c per unit or lower.




Related post:
Saizen REIT: To buy or not to buy.

Republished in NextInsight as:
Saizen REIT: Buy more of the REIT or no?