LMIR: 4Q and FY2013 results.

Exactly one year ago in 2013, I divested a big chunk of my investment in LMIR at 52.5c a unit. At the time, I said that selling at that price meant giving up a distribution yield of some 5.7%. The reason for the partial divestment was the unimpressive performance of the REIT since its rights issue.

Today, one year later, I made my first purchase in an S-REIT since the middle of 2012 as I increased my long position in LMIR, adding a quantum that is about a fifth of what I sold one year ago. So, you can say that, for various reasons, some of which have been discussed here in my blog before, I remain cautious.

At a recent lunch gathering with some friends, when asked, I said that LMIR was still not trading at a price that I would call cheap. Yes, the price I got in today was not cheap but I was looking at a prospective distribution yield of 8.6% which seemed like a fairer proposition compared to 5.7% a year ago but, everything else remaining equal, cheap would mean a 10% yield or higher. Impossible, you think?

When I remind myself that the lowest I paid for LMIR was 18.5c and that I got a huge chunk of rights at 31c, you see what I mean. Prices could plunge again for whatever reason or we could see another rights issue, again, for various reasons.

There was another reason from a FA perspective why I decided to add to my long position. When I blogged about LMIR in August last year, I said that the REIT's term loan maturing this year in June worried me but this concern was addressed when they used the proceeds from the issuance of a 3 year bond to repay the term loan a few months early. This also lowered the REIT's average cost of debt from 6% to 5.3%. A big improvement. Read it: here.

Technically, it also seems to me that the downtrend has been broken and that LMIR's unit price has been consolidating for a while. Of course, no one could tell that unit price has bottomed until after the fact but support seems to have formed at 39c. What is being formed now could be just a floor. We don't know but the momentum oscillators suggested that selling pressure had eased.

Now, the news.

LMIR released their full year results tonight. Here are some of the numbers for 4Q 2013:

DPU: 0.56c
Gearing: 34.3%
Occupancy: 95%
NAV/unit: 41c

The numbers are much weaker than expected. If we were to annualise 4Q DPU, we are looking at a vapid 5.53% distribution yield at 40.5c a unit, my buy price today.

Now, what do we do as unit holders? Press the panic button?

Taking in the bigger picture, what is affecting LMIR's performance in S$ badly is probably the weak Rupiah. However, the Rupiah will eventually bounce back. It always did in the past. In the meantime, the REIT's management will have to hedge the risk.

Looking at the REIT's numbers, it did not do too badly in terms of NPI, reducing 5.5% in S$ terms, thanks to contributions from new properties probably. What really caused DPU to reduce drastically year on year was the 37.5% increase in financial expenses related to the issuance of the MTNs. Now, if these expenses do not recur in the next quarter, then, DPU could improve by quite a bit in the same period.

The next time the REIT has to raise funds could be end of this year or early next year as a $200 million MTN matures in July 2015. So, it is very likely that DPU for the next quarter could be higher. How much higher?

All else being equal, I think that a DPU of 0.66c in the next quarter is realistic. Of course, if the management works hard at bumping up occupancy, DPU could even surprise on the upside. All this is assuming that the Rupiah stays at current levels. Even a slight strengthening of the Rupiah could provide a lift to the REIT's performance.

Of course, there is no saying how Mr. Market would react although a sell off tomorrow would be quite natural. 39c could indeed be just a floor and not the bottom. Next support could be found at 35.5c, the low of 4 June 2012.

See slides presentation: here.
See financial statement: here.

Related posts:
1. LMIR: Divested 42.5% at 52.5c.
2. LMIR: 2Q 2013 DPU 0.93c.

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?