REITs checklist part 1: Superficial analysis of REITs

I compiled this REITs checklist for myself so that I can analyse a company’s financial statement thouroughly to ensure that I am buying a REIT that is not overvalued or overhyped. With this I hope I can organise my thought process properly, not just jump onto the bandwagon and blindly follow what other people buy. At the end of the day I wish to be able to value-add to my thought process by being able to independently analyse and justify my choice for buying a certain stock/REIT.

Buying a stock requires you to do your own research, to analyse the financial statement the companies release, not blindly buying a stock simply because others are buying it now, or buy it because they have high dividend yields. Ultimately it depends on your financial goals, for me I want to invest in the business model of the company because I know that despite a recession, the company will not go bankrupt overnight, share prices may rise or fall but the stability of the company is what assures investors like you and me to buy the stock.

With that I present to you the basics of REITs checklist…These are the superficial data of stocks I will look at before deciding to buy a stock. I will try to explain each invidual matrix to the best of my ability so do correct me if I am wrong:)

Net Asset Value (NAV)

To me NAV means the share price of the company, basically it means the price the company value themselves at based on their total equity and the total amount of shares they give out.

NAV= (Asset – Liabilities)/ Total number of outstanding shares

Price to book ratio (P/B)

So what is price to book ratio? It is simply how many times the market is trading more than the NAV of the company.

P/B= Market value per share/NAV

• P/B <1 (it means that the stock is undervalued)
• P/B = 1 (it means that the market is trading at the NAV of the company)
• P/B >1 (it means that the market is trading higher than the NAV of the company)

It is always better to buy stocks that are undervalued because the room for capital gains is greater, however with that being said, not all stocks that have P/B>1 means that they are overvalued, you must compare it to their historical price to see if they are really overvalued or this is the common range of price they have been trading at.

**For me I am comfortable of trading at a P/B ratio from 0.8~1.25

Distribution Per Unit (DPU)

This means the amount companies pay shareholders for holding a unit of their stock. DPU is always in cents.

For example:

Ascendas-HTRUST’s Distribution Per Unit is 3.22 cents ($0.0322). If I buy 2000 shares of AHT, I would receive $64.40 worth of dividends.

$0.0322 x 2000 = $64.40

**A good company MUST consistently improve their DPU YoY

Distribution Yield

Distribution Yield = (Annual DPU/ Share price) x 100%

A company that has high distribution yield may not always be a good stock, it could be due to their falling share price which results in high yield. There are many underlying reasons as to why their yield is high, so always do your homework and analyse it yourself.

Gearing Ratio

A gearing ratio is also known as leverage. It is the amount of debt the company has as compared to their equity. In Singapore, REITs are capped at a maximum of 45% gearing ratio. A company with lower gearing ratio allows more headroom to take on debts for operations of the company.

**Usually a healthy gearing ratio is between 32%-36%