Considerations on Saizen REIT

Caelitus of CNA forums has kindly formed some questions for me to refine my thought processes regarding Saizen. I appreciate that a lot, and I'm posting his questions, and my answers here as a reference.

From Caelitus:
I will write candidly. From what I know, you have 40 lots of the share and 60 lots of the warrant. This is over and above your existing holdings which remain unknown to me. If you were to load more of the mother share, your exposure to this counter is increased compared to that of one where you converted your warrants. The latter brings the amount you committed to the warrants to earn the dividends (productive, de-risking).

Question yourself.
1. What are your rules on risk optimisation?
2. What percentage does Saizen form as a part of your portfolio?
3. As Saizen is focused on the Japanese residential market for 2nd tier cities, what are the opportunities and threats ahead? Deflation, diminishing population, portfolio of freehold properties available for redevelopment?
4. What is the opportunity cost? What about your other targets for dividend play or capital gain? We can look forward to future distributions but Saizen is not bounded by any regulation to distribute 90% of their income. Note the huge bank of warrants which has a very dilutive effect.
5. Management seems to be on the ball after the lessons learnt and have put their own money on the table. Is that positive enough for you?
6. What are your money management rules? Note your projected activities e.g. marriage, your book and your home purchase. As your combined salaries rise, you may not qualify to purchase a flat from HDB direct. A 1st appeal may work but the 2nd may not. Hence, you may need to strike at the private residential market. Will you have enough cash without having to liquidate preciously built positions from Apr/May 09?

I thought questions 1 and 2 are important to guide you. Answer (2) and follow (1) diligently.

 -----------------------------------------------------------------------------------

My Answers:


1) Pardon me, for I don't really understand what is risk optimisation. To me, this counter is one of lower risks as the downside is probably limited while being way below it's NAV. Overall, my amount in blue chips is about the same as my amount in REITs and Trusts, and these two form the bulk of my portfolio, at nearly 80%.

2) For 100 lots, it will be about 9.4% of my portfolio (including cash ready for investing). This percentage will drop over time as I will be seek to top up more on Starhub and SPH, and AIMS, and hopefully drop to only about 8+% by the end of year.

3) As a matter of fact, Saizen's growth will be stunted for quite a while. The main draw to buying is that I see is as one of the most undervalued REITs in SGX. Coupled with the fact that most people are still affected by the shadow of 2007, I go with my judgment and calculations to top up my holdings yesterday. The results were above my personal expectations as well.

4) Warrants subscription gives the management more leeway in managing their debts as well. I have done my calculations on the warrants too: http://wealthbuch.blogspot.com/2010/03/saizen-reit-analysis-part-2.html

5) I'm happier with the management's actions of converting all their CMBS loans to the more traditional bank loans.

6) I will have sufficient for those projected activities. Currently, my dividends stand at $800/mth on average, with the bulk coming in at the end of year. I have my bonus and AWS coming in soon too. All these will be sufficient to boost my war chest come end 2010.

As for home purchase, I can still qualify at the moment. I have applied for Fernvale Foliage, and gotten queue num 132 for the 168 flats. The probability of me choosing a flat here this time is very high as I like the facing and direction of all 8 blocks of the 5-rm flats so far. Should be able to get a minimum of 5th floor I guess. It will take 4 years to build, so it would be a long way before I need any cash for renovation.