In 2010, I disclosed that I was long Saizen REIT. Its unit price has appreciated some 40% since and it still offers a distribution yield of 7% today.
Saizen REIT is now one of my top three 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.
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.
NAV/unit: S$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.
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 in a bind during the Global Financial Crisis 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.
Activist shareholder.
It was reported that a major investor in Saizen REIT was unhappy with the lack of growth in the REIT. Well, actually, the fact that Argyle Street Management (ASM) is unhappy isn't anything new.
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 S$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 S$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 S$1.35 to S$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.
For anyone wondering if he should buy into Saizen REIT, he might want to ask if he would be happy being paid a 7% distribution yield buying into rather undervalued freehold Japanese residential real estate. Being paid well while we wait? Sounds good to me.