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Commentary: Dasin Retail Trust – Value Investment Or Value Trap?

June 4, 2023 – REITs globally have taken a beating over the past two years as interest rate hikes increased REITs’ cost of financing and the higher yields presented a higher investment hurdle rate to investors. Coupled with slowdowns in selective property sectors such as office, where post-COVID hybrid work arrangements saw a structural decline in office demand, it has not at all been easy for REIT managers.

Dasin Retail Trust, which owns malls in China, is down 82% from its value two years ago. A small part of this can be attributed to the negative trend for the sector over the past two years, but many more issues are of its own making.

The Chinese landlord had technically defaulted on a S$13.1 million loan in January this year, after a series of loan repayment extensions since 2021. These cashflow issues sent the stock into freefall, most recently compounded in May 2023 by former Chairman of the REIT manager, substantial shareholder and non-executive director – Zhang Zhencheng, suing lead independent director Tan Huay Lim to remove Tan from board as well as to restrain his involvement in discussions with “a reputable Chinese entity”, from meeting with the Singapore Stock Exchange (SGX) unilaterally and from participation in the refinancing of the facilities. Zhang also sought to terminate FTI Consulting’s services in conducting an independent business review and to restrain FTI from further involvement in the refinancing of loan facilities. 

While the precise disagreements leading to this state of affairs is unclear, it does seem like there is a split in opinion between economically-vested insiders and independent consultants on how to resolve the cashflow issues. Moreover, aside from Zhang’s interest in the REIT, his family reportedly also has stakes in entities that were master tenants of some of the properties, are in arrears on rental payments, and have had the leases terminated.

On paper, Dasin Retail Trust’s seven malls have a carrying value of S$1.8 billion and liabilities of around S$1.4 billion. Factoring some working capital held in cash, Dasin Retail Trust probably has around S$500 million in net tangible asset value against its current market capitalisation of S$125 million.

Whilst the current pricing relative to asset value seems to represent an attractive value investment, the REIT has also been loss-making after COVID resulted in a wave of tenants defaulting on rent and breaking their lease agreements. Although the most recent valuations already factor in the decline in portfolio occupancy and income level, it is yet uncertain at what level the new leases will be signed, how long the properties will remain vacant, and if/ when the REIT will be able to return to sustained profitability. 

Importantly, given Dasin Retail Trust’s default and breach of loan covenants, its cost of financing would probably risen sharply. Given the majority owner of Dasin’s trustee-manager – Sino Ocean, is also facing financial difficulties, a sponsor-led rescue is unlikely.

What’s likely to happen in this circumstance is:

  1. Lenders will either agree to extend loan repayment periods till Dasin’s business recovers and it is able to start paying down interest and principal progressively; 
  2. Lenders seek to seize assets held as collateral and equity holders receive the balance post disposal; or,
  3. Dasin proactively sells some assets to pay down some loans and achieves a more sustainable financial position.

While the third option is best, it might be noted that Dasin has been seeking a solution to its financial issues for over a year without clear resolution. It is probable that there is a mismatch between the price buyers are willing to offer for the assets and the price Dasin is willing to accept, and this gap does not seem likely to go away anytime soon.

In this context, Dasin looks to be great value on paper, but investors should have in their minds their position if lenders were to seek to seize assets in repayment of loans.