Sunday, June 1, 2014

The Japan story - Croesus retail trust and Saizen Reit

Croesus retail trust and Saizen Reit have been two of my favourite investments since day one. One is a business trust while one is a real estate investment trust. One owns shopping malls while the other owns residential properties. What do they have in common? They are both from Japan.



The investments in these two companies have proved to be a good one. Recently, the stock price of these two companies went up one after the other.

Croesus Retail Trust


Saizen Reit


My first write up on investing in Japan is here: Looking to invest in Japan's real estate
This was written in November last year before the run up.

The whole motivation behind investing in Japan's real estate is fundamentally due to economic reasons. As readers would know, Japanese prime minister Shinz┼Ź Abe has launched Abenomics which is a combination of measures such as quantitative easing (QE), increased public infrastructure spending and the devaluation of the Yen. All these stimulate growth which will increase asset prices. Investing in Japanese property may be a good choice if growth does set in and bring the Japanese economy out of a decade of deflationary economy.

Croesus and Saizen were the two Japanese companies that are listed in Singapore. Investing in them was the way to gain access to the Japanese market. Let's take another brief look on Croesus retail trust and Saizen Reit to understand what they do and whether its still a good investment at the current price?


Saizen Reit
Saizen Reit has a portfolio of income producing real estates. These properties are mostly residential properties. To date, it has 139 properties spread across 14 cities in Japan. Occupancy rate is at 91.1%  in 3Q FY2014. As home ownership is low at about 60% in Japan, rental properties are still in strong demand there. Rental prices are set to rise as Japan's economy recover.


The NAV of Saizen Reit is $1.17 as at 31 March 2014. At the current price of $0.96, this still represents a discount to NAV of about 18%. The annualised dividend yield is about 6.67% at the current price. It's gearing ratio is about 38% as at 31 March 2014. This represents the total debt it has to its assets.

Moving forward, will Saizen Reit be able to maintain or even increase its dividend payouts? This is an important question to ask for investors investing for income. The first dividend payout this year was comparable to the first dividend they gave out last year. All else remaining equal, we should still see dividends in the range of 6.5% for FY2014.

At 6.5% dividend yield, is it still a good offer? I personally would prefer a yield of at least 7%. But with the stability of Saizen Reit which owns residential properties, the yield is still quite a good offer for investors.


Croesus Retail Trust
Croesus retail trust is a business trust which owns shopping centres in Japan. Currently, it has 6 shopping centres all located in Japan. When i invested in it, the trust had only 4 shopping centres and recently it acquire 2 more shopping malls located in Tokyo city itself.



The NAV for the trust is at 88cents. At the current price of 94.5 cents, this represents a premium to NAV of 7.4%. The gearing ratio is at 53.5% which is rather high. The gearing ratio was 41.8% before it acquired the 2 properties in Tokyo. With this, the annualised dividend yield is 8.2% at the current price of 94.5cents.

The trust has manage to declare higher dividend yield than what they previously forecast. They will pay out 100% of their distributable income for the first 2 years ending June 2015 and at least 90% of distributable income thereafter. After June 2015, if rental yields remain constant, the annualised dividend yield should decline to below 8% at the current price.

Now, is it still a good investment if dividends decline below 8% and gearing ratio remain high at more than 50%? I would think the risk is higher as any investor who buys now is buying at a premium to NAV. Buying at fair value of 88cents may be a better choice but anyway, nobody will know how the stock price will move thereafter. It may move up or it may move down. I cannot foretell the future.


I believe Japan will continue to benefit from the monetary policy that they are embarking on now. The Yen has fallen significantly boosting exports and attracting investors into the country. QE has worked in the US, UK and also for the European region. It cushions the impact of a full fledge crisis. Of course there will be side effects such as inflation rising too fast which is the main concern. But Japan is in deflation so i don't think inflation is any concern as of now. It's still interesting to see how the situation will unfold in the future. For now, its just taking the ride up by investing in Japan.

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Related Posts:
1. Looking to invest in Japan's real estate
2. Short interview with Jeremy Yong, Co-founder of Croesus Retail trust

27 comments:

  1. Under saizen FY 2014 March, may i know how you got its dividend yield at 6.67%? because the dividend was 3.25 cents at 21 march. at its share price of 96 cents, 3.25/96*100 would not that give me a dividend yield of only 3.39%? Also may i know for gearing ratio what did you use to find out?

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    Replies
    1. Hi,

      Saizen pays out dividend 2 times a year. I annualised the dividend to get 6.67% taking from reference last year september dividend that it paid. Of coirse we're assuming dividend payout for this year sept remains unchanged. If it's lower, then the dividend yield will be lower.

      Gearing ratio just take the total debt to its equity. You can get the numbers from the balance sheet. For example if debt is 10,000 and equity is 20,000 then the gearing ratio is 50%.

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  2. last year 24 september DPU is 0.63 cents. if you take the current price at 96 cents, it only gives a dividend yield per annum of 1.3125%. Here i am assuming 0.63 given out in september is accounted for the whole year (given out twice).
    hmm from the balance sheet i used the total liabilities/equity giving me a gearing ratio of 41.44%.
    Also i realised the cashflow from operations have dropped from 2010 to 2012 before rising up in 2013. if we had used the DCF to calculate that would have given us a negative CAGR meaning the intrinsic value would be lower than its current value.

    ReplyDelete
    Replies
    1. The DPU was 0.63 cents last year because it was before the 1 of 5 share consolidation. You have to x5 to get the actual value.

      For the gearing ratio, I took the lastest result from its website. For reits I look at the PB ratio which is a better valuation as reits are mainly in the business of properties.

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  3. okay thanks for your help. As a novice investor, i was wondering how you found out about the share consolidation? because it was not stated on the website. it only stated the dividend was 0.63 under distributions. This will certainly aid me when i do my future research.
    As for reits, why do you advice using P/B ratio over DCF?
    on yahoo finance it stated book value/share was 0.94 but the financial statement showed that NAV/share was 1.17. Do you know what is the difference between NAV and BVS?

    ReplyDelete
    Replies
    1. Hi,

      All company announcement and past actions can be found on SGX. Just search the stock name and there is a column on the right side with the dividends. Select read more to see all other past announcements.

      For reits, they own properties which is why using book value is a better valuation. If the current stock price is less than the NAV/share, then the book value will be less than 1. This means if we buy at a price lower than NAV/share, we're buying the stock at less than its asset value. What is BVS?

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  4. What I meant was book value per share and NAV per share are both the same thing right? But on yahoo finance the book value/share does not tally with the nav/share on the financial statement.

    Did you mean price to book value will be less than 1 if current stock price is less than NAV/share?

    ReplyDelete
    Replies
    1. Hi,

      Yes, NAV and book value is the same. Probably yahoo finance numbers are not up to date. I prefer to use bloomberg businessweek.

      Yup, I meant the price to book ratio is less than 1. Sorry for the confusion.

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  5. Okay may I know under which section they show the NAV in BLOOMBERG? Because I can't seem to find it. Also,
    may I know for the gearing ratio did you calculate yourself? Or where is it located in the statement?

    ReplyDelete
    Replies
    1. Hi,

      Bloomberg shows the PB ratio. Its located at the bottom right side. For gearing ratio of saizen reit, I took it from its May 2014 presentation to investors. They stated gearing at 38% and net gearing at 32%. The gearing is calculated base on total borrowings/total assets.

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    2. may i know how to use its EPS to valuate companies dealing with REITS, in this case Saizen reit? Analyst usually use PER of 10x etc but what would be a good estimate?

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    3. hi, on the company website may i know where can i check if insiders are buying and whether the company itself is buying back its own shares?

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    4. Hi,

      You have to understand what is the PER first. If a company has a P/E ratio of 50, it means that if the company earns the same profits, it would take the company 50 years to earn enough earnings to return you your capital. Is it still worth investing in it? If the PER is 10, then it will take the company 10 years to earn enough earnings to return your capital. This means the earnings yield is 10%(1 divided by 10). That is the reason why analyst like to use a PER of not more than 10.

      Insiders buying or selling can sometimes be found on the company's website investor relation page. SGX also announces each time there is insider activity. For buying back of shares, SGX does have these announcements as well. On the SGX website, click on the company disclosure tab and you can search all the information from there.

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    5. Correct me if I'm wrong but I thought PER (P/E ratio) refers to how many times the stock price is valued against the earnings per share? This earnings here refer to the net profit. Hence if the multiple is lower means the stock is "cheaper" in relation to the profit generated per share?

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    6. hi i have another question i chanced upon this question on why the annual dividend yield is more than the free cash flow yield and the author mentioned that the extra yield may come from Existing Cash Holdings ( See Balance Sheet). May i know if this cash holdings refers to cash under assets or is it retained earnings? Also what is the link between reserves and accumulated profits on the balance sheet?

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    7. hi also another question, when a company announces bonus share, my overall capital remains the same but the company share price will definitely drop right? is the rationale behind the drop in price to entice investors to buy?

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    8. Hi,

      Yes you're correct on the PER.

      The cash portion is the first entry on the balance sheet under cash and equivalents. This is the cash the company currently has. The balance sheet has reserves and accumulated profits? I did not see it. Anyway, if you want to know more about the various financial statements, you can refer to the right side bar of my blog on financial statements explained.

      Bonus share will definitely have a drop in price effect as each share holder gets more shares. Yes, the rationale behind the drop in proce is to entice investors to buy as well as align its price to their other competitors in the same industry so it makes it more attractive.

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    9. what is the diff between cash and cash equivalents under cash flow statement and current asset?

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    10. also why do reits management not have cash in their balance sheet?

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    11. Hi,

      The balance sheet shows the cash it has. The cash flow statement shows the change in cash. Reits do have cash in their balance sheet. All companies should have cash.

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    12. so with regards to the balanche sheet under liabilities, the borrowings here are the same as financing activities under cash flow?

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    13. does this also mean that cash and cash equivalents under cash flow only show changes for that particular quarter/year whereas the cash balance under balance sheet shows the total cash since they started which paints a fuller picture?

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    14. Hi,

      Looks like you did not read my post on the various financial statements.

      Cash from financing:
      Issuance & repayment of debts

      The company can borrow money by issuing debt in the form of bonds. This portion shows you whether the company has borrowed more money or repaid debts it previously borrowed.

      The balance sheet however reflects the total debt. Cash flow statement reflects the flow of debt. In the company's annual report, there is also the notes to financial statement at the back. There, you'll find even more information such as the tenure of the various debts, whether the debts are on fixed or floating rates loans etc.

      Yes, cash flow shows the changes in cash for that particular quarter or year while balance sheet shows the total currently.

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    15. okay thanks. but from the annual report, the cash and equivalents under cashflow statement consist of cash and bank balance and fixed deposits. does this cash and bank balance refer to what you wrote under balance sheet under cash and equivalents?

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    16. Hi,

      Where did you find cash and equivalents under cashflow statement? The cash flow statement always shows the change in cash so its not the same as the balance sheet.

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  6. right at the last part after getting the net cash flow from investing,operating and financing activities, they added in the cash and cash equivalents from the end of previous fiscal year to get cash and cash equivalents.

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    Replies
    1. Hi,

      The last part if its the same as the previous fiscal year then its the same as the one in the balance sheet. They wanted to show the additional this year cash plus the last year cash to add it up to become the current year's cash.

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