OUE REIT has sold its remaining China property, Lippo Plaza for RMB $1.917 Billion
Interestingly, this is at a 20% discount from its last year end valuation of RMB$2.4 Billion. Unitholders of OUE has seen a 20% loss from the sale.
This seems to be one question investors should start to ask. While it is indeed true that most REITs are valued below book value, on SGX, OUE REIT is valued at quite a distance from its NAV. At a 60 cents NAV, OUE REIT trades at 27 cents, representing a price to NAV of 0.45. That is a very wide discount.
As the saying goes: on balance sheet, companies tend to value their assets as fully as possible and liabilities as little as possible. This could be what is happening at Capitaland Ascott REIT disposal where Capitaland has disposed its Ascott REIT shares so that liabilities can disappear from Capitaland balance sheet.
Back to OUE REIT's balance sheet, this puts into question the true worth of OUE's Office and Hotel assets. Of course, REITs pay and hire their own valuers to value and as a result of this conflict of interest, it is inevitable the hired valuers will juice up property values as high as possible, otherwise they wont be hired again next year.
Personally, I find OUE's valuation of OUE Downtown office for $930 million a little too optimistic. The property has a useful lifespan of 42 years remaining with a revenue of $48.8 million (which means net income is about $36.6 million). For an annual inflow of $36.6 million before interest expenses and 42 years, factoring 02 rounds of refurbishment capex needed, $930 million is a very optimistic number. The valuers for OUE downtown must be very optimistic of rental escalations happening at the downtown area.
A call to Call OUE's Bluff or Encashing Proftiably
Based on valuation, OUE REIT has a 0.45-0.50 price to book value. This means if the property is liqudated now at the valuer's valuation of end 2023, investors can nett about 90% in gains, excluding the approximate 7% in annual dividend yield.
In the minutes of 2024's AGM 2023, a unitholder (minutes termed him as "Unitholder A") had voiced out this discrepancy in valuation and a solution was for OUE REIT to sell off its property portfolio so that unitholders will benefit.
I think it seems to be a sound solution. If indeed all its remaining Singapore properties are worth its value in writing by cashflow discounting and valuation of hotels per key, unit holders will gain tremendously. The valuer's usage of discount rate for its office properties at 3.5% is way lower than OUE REIT's cost of debt at 4.5%-4.9%, hence selling off its office properties can benefit the REIT.
The sale of Lippo Plaza has shown OUE REIT's valuers might be "smoking weed" when performing the maths. It was a discount of 20%. If 20% is applied on its entire portfolio, this translates to 0.65 times of the price to net book value, assuming a complete sale of assets. So it might be good for unitholders to encash on OUE REIT when the property market is at a party high. To be fair, I do think 0.7 times of the net book value can be achieved; an upside of about 55%.
OUE has 02 properties (OUE Downtown, Hilton Singapore Orchard) running low on its title deed leases. The effects of lease decay is going to hurt the REIT greatly. These 02 assets form 40% of OUE REITs value and therefore should be encashed soon to avoid financial disaster.
Unitholders of OUE REIT should sound this out urgently. The market has already seemed to price OUE REIT at such a discount knowing these information. Pherhaps OUE Unitholders should call out the bluff, even if they are wrong and the properties fetch the reported values, unitholders enjoy massive upside from current share prices. It is a very good time to call out OUE REIT's hand in this game of poker. It is a "Head I win, tails you lose" moment for anyone who buys into the current market price and call the bluff.
<Not Vested at the Moment, But May Consider Purchasing after doing purchases on APTT and other REITS)
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