REIT-TIREMENT - REITs Investing & Personal Finance

REITs investment & personal finance


Friday, April 12, 2019

Relative Valuation for REITs

Relative Valuation is a method to compare a companies value to other companies by using multiples. One of the popular relative valuation multiples is price to earnings ratio (P/E ratio). However, P/E ratio is not applicable to REITs as their assets are heavily in investment properties and revaluation would skew the earning.

For REITs, commonly investors would apply the concept of reversion to mean to relative valuation multiples like P/NAV, yield or yield spread (introduced by ProButtefly). There are a few sites that you could refer to for detail:
1) Invest For Yourself - CapitaLand Retail China, my latest target!
2) My Stock Investing - Singapore REIT Price / NAV Range Chart Feb-2019
3) Probutterfly - What Is A Fair Price to Pay for Ascendas REIT amidst Rising Interest Rates?
4) REIT Screener (Subscription Required)
Black Line is the Mean
For this post, we would explore step by step how could we apply reversion to mean for P/NAV, dividend yield and 52 weeks price. For easy understanding, I would take AIMS AMP Capital Industrial REIT as a working example.

1) Historical Stock Price
You could get a stock historical price from Yahoo Finance. Search for the desired counter in Yahoo Finance, click the "historical data" page, then select "time period", click "apply" and then "download data". It would save into excel format. For a working example, we would choose a date range from 1-1-2014 to 31-12-2018.


2) Record Quarter Average Closing Price
Since REITs release finance result on a quarter basis, let's group closing price into the quarter basis for analysis. For the date range from 1-1-2014 to 31-12-2018, you would have 20 quarters of the average closing price. You could use an excel formula to facilitate the calculation process, refer to below screenshot for the formula.

3) Record DPU and NAV per unit
This requires a bit of homework, you would have to extra both DPU and NAV information from the quarter presentation slide or financial statement. Even for the semi-annual distribution type, you could get the DPU reserved for quarters that have no distribution. For NAV per unit, do read on Basic Financial Metrics of REITs, as NAV presentation by REITs is not standardized. You may want to calculate manually yourself to maintain data consistency.

4) Input data into Spreadsheet 
Now is time to put all data into a spreadsheet for analysis, refer below for the Google Sheet of AIMS AMP Capital Industrial REIT Analysis. Green cells are what you suppose to key in manually. Price and 52 weeks high/low price are direct imports from yahoo finance.

From the above, based on the past 5 years data, you could get:
i) Average Price on Price/NAV  - $ 1.32
ii) Average Price on Dividend Yield - $ 1.32
iii) Average Price on 52 Weeks Close Price - $ 1.36 (at the point of writing this post, change according to live yahoo price)
Note that for iii, I first calculate 5 years average price percentile and apply the percentile to 52 weeks close price.

I have inserted a line chart for 5 years range and also a candlestick chart (improvised for mean reversion function) to check whether the current price is either higher than average, lower than average or close to average.

You could make a copy and customized it for your own use through the link here. If you encounter "N/A" for the price, try to delete the price cell and undo it. If you find any errors or need any help, do let me know. Hope this is useful to you.

9 comments:

  1. When you break it into quarters, do you just use calendar years or align to the financial year if the REIT? The financial year for each REIT could be different, resulting in different months that make up a quarter (e.g. if the financial cycle runs from. 1 Apr 2017 to 31 Mar 2018, then the 4th quarter is actually 1Jan to 31 Mar 18)

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    Replies
    1. I use calender years for ease of comparison between each REIT. Else I would be having hard time to trace the fiscal quarter.

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  2. Hi, May I know what formula did you use in excel to calculate average close price, average NAV for the different quarters? thank you very much

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  3. Hi KX,
    For quarter average price, goto yahoo finance historical stock price, select a date range and download. Then you could use the formula in step 2 to calculate quarter average closing price.
    As for quarter NAV, i use NAV represented by unitholder's fund divided by issued unit at end of period. Alternatively, you could take the value from result presentation.

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  4. Hi Vince pls forgive my ignorance but I'm totally lost on the results:
    i) Average Price on Price/NAV - $ 1.32
    ii) Average Price on Dividend Yield - $ 1.32

    What are they?

    Last but not the least, how do I get access to the Google sheet(s)? Each time I click the link in "Published by Google Sheets" I was brought to my own google sheets page.Another clickable is "Brought to you by: REIT-TIREMENT" which will open your site in a new tab in Chrome. I wonder if Google has changed beahvior since 2019..

    By the way, a new online tool that is getting traction with gen-z'ers is https://www.notion.so/help/tables
    Maybe you can give its table feature a try?

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    Replies
    1. ps. the first link of "invest for yourself" is obsolete and I found anohter one (that is probaly where the site migrated to):
      https://investforyourself.wordpress.com/2018/08/26/capitaretailchina-my-latest-target/

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    2. The average price is refer to the 5 years average price on Price/NAV and dividend yield. The google sheet link is at the bottom of the post, however, I have updated it at the Part 4 for easier assess.

      Thanks for your information on Notion, but there is no embed function for it.

      I have updated the link as you provided.

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    3. All clear now, thanks for getting back!
      QQ: the avg price calculated from Price/NAV and from yield are identical, is this just a coincidence?

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