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What Are The Issues With Valuation? (Magazine)

Here are some recent cases that prompted valuation debates.

SINGAPORE: Valuation of property acquired by Shairah-compliant Sabana REIT contested

In 2017, disgruntled unitholders of Sabana REIT lodged a complaint with the Singapore police arguing that three independently contracted firms reached the same valuation of a property to be acquired. All three concluded that the property was worth exactly S$23 million, which is also the price at which Vibrant, Sabana’s sponsor, would sell the asset to Sabana. In 2011, Vibrant paid just $10.9 million for the asset.

Amid pressure from unitholders, the Shariah-compliant REIT started a strategic review of its operations while it answered queries from the Singapore Stock Exchange.

The REIT later terminated the proposed acquisition, and a spate of resignations ensued, including its chief executive officer.At the end of 2017, the Shariah-compliant REIT s started a three-phase strategy to enhance performance, which included rejuvenating its portfolio through selective divestments and active asset management and renewal of its leadership.

AUSTRALIA: Rural Funds Group Wins Legal Battle Against Allegations Of Overstated Valuation

Agricultural real estate investment trust (REIT) Rural Funds Group was embroiled in a battle against Texas-based activist short-seller Bonitas Research.

In August 2019, Bonitas Research published a report that claimed, among others, that Rural Funds Group overstated the value of its assets and that its equity was “ultimately worthless.”

It claimed that Rural Funds Group’s true net asset figure was only A$268 million as of December 31, 2018. Shortly after Bonitas published its report, Rural Funds Group’s stock price plummeted by more than 40%, wiping A$335 million off its stock value. Rural Funds Group then went into a trading halt and issued a statement to reject the claims made by Bonitas.

In the statement, Rural Funds Group said Bonitas’ allegations of financial impropriety and irregularity are “unfounded.” It also announced that it had engaged Ernst & Young to “independently investigate the matters raised and assess Rural Funds Group’s rejection each of the claims made in the document.”

The accountancy firm released its findings on September 27, 2019. “The independent investigation conducted by Ernst & Young concludes that the assertions contained within the Document are not substantiated,” the firm said in a statement.

Rural Fund Group later filed legal action against the short seller for its “deliberate and malicious publication of the document, which constitutes “misleading and deceptive conduct.” The manager of Rural Funds alleged that it “suffered losses and damages as a result of the making of the allegations, for which Bonitas and Matthew Wiechert are liable to compensate, including by way of an account of profits.”

On February 12, 2020, the Supreme Court of New South Wales judged in favour of Rural Funds Group, saying Bonitas made “false” and “misleading statements.

HONG KONG: PAG Questions Spring REIT Manager’s Mall Acquisition and Other Transactions

Alternative investment management firm PAG has been active and vocal about its criticisms against Spring Asset Management—the manager of Spring real estate investment trust (REIT).

On February 11, 2020, PAG issued an open letter to the Board of Directors of Spring Asset Management Limited and its controlling shareholder Mercuria Investment Limited urging them to “address Spring REIT’s serious underperformance.” PAG holds an 18.2% interest in Spring REIT and is considered a material unitholder.

Among the main issues were the REIT manager’s proposal to acquire the Huamao Place shopping mall in Huizhou from Huamao Focus, which is a unit of Huamao Property Holdings, for RMB 1.65 billion ($240 million) in 2019.The manager withdrew its proposal after two independent proxy advisors recommended that Spring REIT’s unitholders reject the acquisition.

PAG said the proposed transaction would have involved the issuance of shares at a 44.3% discount to NAV, resulting in a NAV dilution of 8.1%. While the acquisition was terminated, Spring REIT incurred significant expenses as a result of this failed acquisition, for which the manager provided no acceptable explanation, PAG said in the letter.

In the letter, PAG cited other NAV-dilutive transactions which included HK$585 million in convertible bonds to a consortium led by Sino-Ocean Group Holdings Limited. Conversion of these bonds will result in a NAV dilution of 3.8% and a DPU dilution of 3.0%, it said.

In 2018, Spring rejected a voluntary general offer by PAG of HK$5.30 per unit. This offer would have allowed unitholders to realize over nine years of cumulative distributions, which was equivalent to a 70.4% premium to today’s unit price, PAG said. Spring REIT is also trading below its IPO price of HK$3.81.

In an exclusive interview with REITAsiaPac, Kevin Leung, Spring REIT Managing Director, said they are aware of the concerns about the fact that they are trading at a discount. “But again, the entire sector (in Hong Kong) with just one exception is trading at a big discount to Net Asset Value.  We will remain focused on delivering strong cash flows to our unitholders going forward, which is our mandate,” he said.

Story was posted on April 24, 2020.