Everyone loves a great discount when they are shopping for things to buy and this is no exception when it comes to purchasing shares in the stock market. When it comes to REITs, investors should keep their eyes open for good bargains, and these are typically REITs that are trading at a discount to the book values of the properties within their portfolio.
Of course, this is only one aspect which investors should look at for a REIT but it represents a great starting point for doing more due diligence and research in order to build up a coherent investment thesis. Here are two examples of REITs which are trading at discounts to their book value, which investors may wish to consider adding to their portfolios.
1. OUE Commercial REIT
OUE Commercial REIT (SGX: TS0U), or OUECR, is a REIT with a mandate to invest in income-generating properties used primarily for commercial purposes in financial and business hubs within and outside Singapore. The REIT has four commercial properties in its portfolio, comprising OUE Bayfront, One Raffles Place and OUE Downtown Office in Singapore, and Lippo Plaza in Shanghai.
OUECR is trading at a 38% discount to its book value, and in April this year had proposed to merge with OUE Hospitality Trust (SGX: SK7) to create one of the largest diversified REITs with a total asset value of around S$6.8 billion. This proposed merger is still pending approval but if it goes through, it will be distribution per unit (DPU) accretive to unitholders. The current 2018 adjusted DPU of 3.41 Singapore cents will rise to around 3.48 Singapore cents for a 2.1% accretion. This represents an attractive forward dividend yield of around 6.4% based on OUECR’s last traded price of S$0.54.
Note that OUECR had just acquired the office components of OUE Downtown on November 2018, and the Q1 2019 results reflected this contribution as net property income rose by 23.5% year-on-year to S$43.6 million. Investors should be aware, however, that the gearing level for OUECR is very high at 39.4% as at 31 March 2019. It remains to be seen if this level will be subsequently reduced if the merger is approved and goes through.
2. Sabana REIT
Sabana REIT (SGX: M1GU) is an industrial REIT which has a diversified portfolio of 18 quality properties in Singapore amounting to around S$1 billion. These are spread out among the high-tech industrial, warehouse and logistics, chemical warehousing and logistics and general industrial sectors.
Sabana REIT trades at a 22% discount to its book value, and the REIT has seen softer demand for its properties as industrial over-supply conditions persist. This may explain why the REIT is trading at a discount to its book value, as investors may perceive prospects to be dim for the REIT. In its latest Q2 2019 earnings, Sabana reported a 9.3% year-on-year decline in gross revenue and also a 24.4% year-on-year drop in DPU to 0.62 Singapore cents, as there was reduced rental income from lower occupancies at some properties as well as lower rental income from a smaller property portfolio – 18 properties versus 19 a year ago. Rental reversions are expected to continue to be negative.
However, all this news may already have been digested and priced into the share price. In fact, Sabana has risen 12.5% year-to-date, as the manager undertakes asset enhancement initiatives (AEI) for its New Tech Park property, which is projected to add 42,837 square feet of space and will contribute additional revenue for the REIT. Approval for the next stage of AEI is pending, with target completion in Q4 2020. Aside from this, rental contribution is also expected from a new master tenant at 21 Joo Koon Crescent from November 2019.
Investors may wish to take a closer look at Sabana due to the above factors. The annualised distribution yield for Sabana based on H1 2019 DPU of 1.37 Singapore cents is 6.1%.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.