LHN Limited Addresses Shareholder Concerns on Volatility in Investment Property Valuations

Summary of Key Points

• Significant Fluctuations in Fair Value Adjustments: LHN Limited has experienced pronounced year-on-year swings in the fair value gains and losses of its investment properties over the past five years, resulting in a “yo-yo” pattern in reported earnings.
• Factors Behind Volatility: The company’s management attributes these fluctuations to asset enhancement initiatives, changes in occupancy rates, shifting demand, and the shortening of lease tenures.
• Future Volatility Expected: The Board cautions that fair value adjustments may continue to fluctuate due to changing market factors such as capitalisation rates, rental growth rates, and comparable property transactions.
• Robust Valuation Oversight: The Board, Audit and Risk Committee, and independent auditors closely monitor the valuation process, ensuring the use of competent, independent valuers and market-aligned methodologies.

Details and Developments That Could Impact Share Price

1. Earnings Volatility from Property Revaluations

Shareholders should be aware that LHN Limited’s reported earnings are highly sensitive to fair value adjustments on its investment property portfolio. Over the past five financial years, these adjustments have swung between significant net gains and losses, creating unpredictable earnings results. The management clarified that gains are typically due to successful asset enhancement works, improved occupancy rates, and higher demand for space, while losses result from the absence of such transformations or reduced valuations from shorter lease periods.

2. No Immediate Mitigation of Fluctuations

The Board has indicated that shareholders should anticipate ongoing volatility in fair value adjustments. While asset enhancement and active portfolio management can drive positive revaluations, market-driven factors such as capitalisation rates, long-term rental growth expectations, and comparable property transactions will continue to cause unpredictable movements in valuation. This means that earnings could remain volatile—a potentially price-sensitive factor for investors seeking stability.

3. Valuation Governance and Transparency

LHN Limited emphasises rigorous processes for property valuation. The Group relies on external, independent, and qualified valuers who base their assessments on the properties’ highest and best use. The Audit and Risk Committee scrutinises changes in fair values at every reporting date. Independent auditors also conduct audit procedures, which include:

• Evaluating the competency and independence of external valuers
• Engaging with valuers on valuation techniques and material judgement areas
• Testing the integrity of financial and lease data provided to valuers
• Assessing the reasonableness of key inputs such as discount rates, capitalisation rates, terminal yields, comparable property prices, and development costs

The auditors have concluded that the valuers are members of recognised professional bodies, and that the valuation techniques and assumptions used are in line with market practices.

What Shareholders Should Watch For

• Earnings Volatility: Continued swings in fair value adjustments may materially impact LHN Limited’s reported profits, potentially affecting market sentiment and share price.
• Asset Enhancement Progress: Positive valuation movements are linked to successful asset upgrades and improved occupancy, so future project announcements or operational updates could be significant for the stock price.
• External Market Factors: Broader trends in Singapore’s property market, especially in capitalisation rates and transaction prices, will have a direct impact on the company’s valuations and earnings trajectory.
• Corporate Governance: The company’s strong oversight on valuation practices may reassure investors about the integrity of reported figures, but does not eliminate the inherent volatility in property values.

Conclusion

LHN Limited’s response to shareholder questions ahead of its AGM highlights the ongoing volatility in its investment property valuations and, consequently, its earnings. While the company assures shareholders of robust valuation practices and governance, it does not foresee a reduction in the volatility of fair value adjustments due to the nature of property market dynamics. Investors should consider this inherent risk when evaluating the company’s shares, as future financial reports may continue to show significant swings tied to property revaluations.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investors should conduct their own research or seek professional financial advice before making any investment decisions related to LHN Limited.

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