Evaluation of REITs through Price to Net Asset Value (P/NAV)

A popular key metric used by Warren Buffet, Price to Net Asset Value (NAV) shows how expensive the share is compared to its net asset value. It also reflects how much investors are prepared to pay for $1 for their net asset.

Traditionally, a price to book ratio below 1 is a good value since it potentially indicates that the shares are undervalued. However, it could also mean that something is fundamentally wrong with the company. As such, like all other financial ratios, the price to net asset value ratio should be complemented with other metrics when evaluating the attractiveness or otherwise of a company’s shares.

*Source: Singapore Exchange

With that, let’s dive into the following 5 REITs with current P/NAV below 1.

All data as of 2 May 2019.

1. Fortune REIT HKD (F25U)

Fortune Real Estate Investment Trust was listed on Singapore Exchange Securities Trading Limited on 12 August 2003. It holds a portfolio of eleven retail malls and properties in Hong Kong, through the ownership of special purpose companies, worth approximately HK$9.2 billion. Fortune REIT is managed by ARA Asset Management (Singapore) Limited. ARA Asset Management (Singapore) Limited is part of ARA Asset Management Limited Group ('ARA'), a member of the Hong Kong based multinational conglomerate Cheung Kong (Holdings) Limited.

Let’s start by looking at the overall financial health of Fortune REIT.

As of 2nd May, the P/NAV for Fortune REIT is at 0.6128.

With the increase in the average historical price, which rose larger than the increase in NAV, we are seeing a lower p/NAV across the last 2 years, resulting in a negative period to period percentage growth.

Beyond P/NAV, distribution yield has also increase 41% to 5.04% across a 10 years period. With its current yield, it is comparable with the local REITs which are giving a yield averaging 5-7%.

The most concerning factor for Fortune REIT is their ability to meet their short-term obligation with its current asset, as per below ratio across the last 4 years.

2. OUE Commercial REIT (TS0U)

OUE C-REIT is a Singapore real estate investment trust listed on the Main Board of Singapore Exchange Securities Trading Limited. It was established with the principal investment strategy of investing, directly or indirectly, in a portfolio of income-producing real estate which is used primarily for commercial purposes (including real estate used primarily for office and/or retail purposes) in financial and business hubs within and outside of Singapore, as well as real estate-related assets.

Below is the overall financial health of OUE C-REIT at a glance.

With a current P/NAV at 0.7091, based on adjusted data, 2018 is the first year that OUR C-REIT falls below the value of 1.

However, based on the current overall financial health, there are various aspects that investors should watch out or be alert to and one such area is the cash flow. Let’s peek into some insights to their current cash flow.

One major impact is the negative cash flow generated from their investing activities which has been declining for the past 2 years.

3. Far East Hospitality Trust (Q5T)

Far East Hospitality Trust is the first and only Singapore-focused hotel and serviced residence hospitality trust listed on the Main Board of Singapore Exchange Securities Trading Limited. Comprising Far East Hospitality Real Estate Investment Trust ("Far East H-REIT") and Far East Hospitality Business Trust ("Far East H-BT"), it is Singapore’s largest diversified hospitality portfolio by asset value.

Below is the overall financial health of Far East H-Trust at a glance.

At its current P/NAV at 0.7603, it is much more attractive compared to its peer, CDL Hospitality Trust (J85) at 1.0447 and OUE Hospital Trust (SK7) at 0.9535

Below is the historical P/NAV across 10 years.

Their current financial health denotes positive revenue and profit growth. If you had invested 2 years ago, this stock would have generated a return of close to 22% for your portfolio.

Like OUE C-Trust, investor should take note of Far East HTrust declining free cash flow which is current at a negative figure.

One possible factor is the negative cash flow generated from its investing activities.

4. Starhill Global REIT (P40U)

Starhill Global REIT is a Singapore-based real estate investment trust investing primarily in real estate used for retail and office purposes, both in Singapore and overseas. Since its listing on the Mainboard of the Singapore Exchange Securities Trading Limited on 20 September 2005, Starhill Global REIT has grown its initial portfolio from interests in two landmark properties on Orchard Road in Singapore to 13 properties in Singapore, Malaysia, Australia, Japan and China, valued at about S$2.6 billion.

The overall financial health of Starhill Global REIT reflects a mix of responses as per below:

Based on P/NAV, Starhill Global REIT has been quite constant in its P/NAV of 0.8 since 2013.

While Starhill Global REIT records positive net earnings margin for the past 10 years, it is also on a declining trend based on period to period % growth since 2017.

Beyond earnings, the declining performance of their distribution payout is another consideration for REITs investors.

5. Keppel REIT (K71U)

Listed by way of an introduction on 28 April 2006 as a real estate investment trust ("REIT") on the Singapore Exchange Securities Trading

Limited, Keppel REIT's objective is to generate stable income and long-term growth for Unitholders by owning and investing in a portfolio of quality income-producing commercial real estate and real estate-related assets in Singapore and across Asia.

Sponsored by Keppel Land Limited, one of Asia's leading property developers, and managed by Keppel REIT Management Limited, a wholly-owned subsidiary of Keppel Land, Keppel REIT has an asset size of $6.35 billion comprising premium commercial assets strategically located in the central business districts of Singapore, and key cities of Sydney and Brisbane in Australia as at 30 September 2012.

In Singapore, Keppel REIT owns Bugis Junction Towers, a one-third interest in Marina Bay Financial Centre Towers 1 & 2 and Marina Bay Link Mall ("MBFC Phase 1"), a 99.9% interest in Ocean Financial Centre, a one-third interest in One Raffles Quay, and a 92.8% interest in Prudential Tower.

In Australia, Keppel REIT owns the 77 King Street Office Tower and a 50% interest in 8 Chifley Square, both in Sydney as well as a 50% interest in 275 George Street in Brisbane. On 26 September 2012, Keppel REIT announced the acquisition of a 50% interest in a new office tower to be built on the site of the Old Treasury Building in Perth, Western Australia.

A glance of their overall financial health below:

With a current P/NAV at 0.890, the period on period growth is quite constant.

Also, with all positive news and results announcements, especially its entry into Seoul, the estimate projections has a positive run comparing both revenue and profitability from 1 year ago vs 3 months.

One concern as a REITs investor is again their distribution payout significantly based on the chart below, it is on a declining trend.

Beyond P/NAV and the above insights, there are more evaluation metrics to consider before investing into a REIT.

Check out ShareInvestor’s webpro to access timely updates to empower your investment research - http://www.shareinvestor.com/sg

Happy investing!

 

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