Saizen REIT reported a 70.5% decline in quarterly net income from operations. What investors in Saizen REIT should be concerned with is the permanence of the decline.
Saizen REIT saw a 2% increase in gross revenue, quarter on quarter, but a 15% increase in operating expenses and this led to NPI reducing 3.3%. If the higher operating expenses are the new norm, then, expecting a marginal decline in future DPU makes sense.
The biggest blow comes from "other operating expenses". This saw a 7.5x increase. This was what led to such a big decline in quarterly income from operations. However, remember that this is a one off event.
Basically, Saizen REIT terminated certain loans to refinance under better terms and to extend maturities. Although with the early terminations came hefty costs, bearing in mind that these are one time costs, the REIT has emerged stronger from the refinancing efforts. Why?
1. The cost of refinancing will be recovered in less than two years from interest savings achieved from new lower interest bearing loans.
2. The higher loan to value ratios of the new loans lead to more possibilities in debt funded acquisitions which will up income and, most probably, DPU too.
3. The earliest maturity date of Saizen REIT's loans is now in February 2018.
The pain that comes from such a large decline in quarterly net income from operations will pass because the costs that come from refinancing are a one off event. However, the benefits of the mentioned refinancing are longer lasting and will benefit anyone investing in Saizen REIT for income, all else remaining equal.
A pertinent question would be how the weaker Japanese Yen is going to impact valuation in S$ terms. NAV/unit of JPY18.69 means 22.86c in S$ terms today. So, the REIT is still undervalued, trading at under 20c per unit. However, this is less so than a year ago.
In the absence of yield accretive acquisitions and further improvement in occupancy which has improved to 92.2% on average, it is reasonable to expect DPU to be affected negatively.
Investing in Saizen REIT is buying into a conservatively leveraged play on Japanese residential real estate and a conviction that the Japanese economy will see better days ahead. With the JPY much weaker than the S$ these days, anyone investing for income should temper their expectations in terms of DPU in S$ terms.
Saizen REIT saw a 2% increase in gross revenue, quarter on quarter, but a 15% increase in operating expenses and this led to NPI reducing 3.3%. If the higher operating expenses are the new norm, then, expecting a marginal decline in future DPU makes sense.
The biggest blow comes from "other operating expenses". This saw a 7.5x increase. This was what led to such a big decline in quarterly income from operations. However, remember that this is a one off event.
Basically, Saizen REIT terminated certain loans to refinance under better terms and to extend maturities. Although with the early terminations came hefty costs, bearing in mind that these are one time costs, the REIT has emerged stronger from the refinancing efforts. Why?
1. The cost of refinancing will be recovered in less than two years from interest savings achieved from new lower interest bearing loans.
2. The higher loan to value ratios of the new loans lead to more possibilities in debt funded acquisitions which will up income and, most probably, DPU too.
3. The earliest maturity date of Saizen REIT's loans is now in February 2018.
The pain that comes from such a large decline in quarterly net income from operations will pass because the costs that come from refinancing are a one off event. However, the benefits of the mentioned refinancing are longer lasting and will benefit anyone investing in Saizen REIT for income, all else remaining equal.
A pertinent question would be how the weaker Japanese Yen is going to impact valuation in S$ terms. NAV/unit of JPY18.69 means 22.86c in S$ terms today. So, the REIT is still undervalued, trading at under 20c per unit. However, this is less so than a year ago.
In the absence of yield accretive acquisitions and further improvement in occupancy which has improved to 92.2% on average, it is reasonable to expect DPU to be affected negatively.
Investing in Saizen REIT is buying into a conservatively leveraged play on Japanese residential real estate and a conviction that the Japanese economy will see better days ahead. With the JPY much weaker than the S$ these days, anyone investing for income should temper their expectations in terms of DPU in S$ terms.
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