DBS Group Research has kept its "buy" call and 33 cents target price on OUE REIT after the proposed sale of its stake in a Shanghai property.
According to OUE REIT on Dec 20, it plans to divest its 91.2% stake in Lippo Plaza Shanghai for RMB 1.92 billion ($357 million) and at an agreed property value of RMB 1.68 billion.
The agreed property value is at a discount of 5% to the last independent valuation of RMB 1.77 billion conducted in December, which is a 30% drop from the value of RMB 2.4 billion accorded a year earlier.
"The property’s shortening leasehold tenure and vintage building specifications have started to impact its valuation and competitiveness, especially with the current supply overhang in the Shanghai market," says Han Khim Siew, CEO of the REIT's manager.
"The stewardship of Lippo Plaza has now been entrusted to a committed long-term investor attracted by the property’s very prime location," he adds.
In its Dec 23 note, DBS observes that the ongoing oversupply and weak operating climate in China have resulted in continued weakness in leasing and transaction velocity in Shanghai, even for a prime location that Lippo Plaza Shanghai is located in.
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Lippo Plaza Shanghai is the REIT's sole asset in this market - one where OUE REIT has no plans for further expansion. The property formed around 6.6% of the REIT’s portfolio value.
DBS views this proposed sale as positive for OUE REIT, as it can now be a "unique pure-play Singapore commercial REIT".
"While divestment at a discount is painful in our opinion, the exit yield, based on the FY2023 net property income is estimated to be around 5.7% and is expected to drive a 1.4% accretion to DPU, if the funds were utilised towards repaying debt.
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DBS estimates that if proceeds were used to pay down debt, OUE REIT's gearing would ease to 35% which gives it the room to make new acquisitions.
It estimates that the impact on the REIT's NAV is marginal - from 60 cents per unit to 59 cents.
With the REIT now trading at a 55% discount to its NAV, it is "looking interesting" given how it has "de-risked" its overall income profile, says DBS.
OUE REIT units changed hands at 28 cents as at 12.10 pm, up 3.7% thus far today.
