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 earning ratio (P/E ratio). However, P/E ratio is not applicable to REITs as its assets are heavily in investment properties and revaluation would skew the earning.

For REITs, commonly investor 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 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 to P/NAV, dividend yield and 52 weeks price. For easy understanding, I would take AIMS AMP Capital Industrial REIT as working example.

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


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

3) Record DPU and NAV per unit
This require a bit of homework, you would have to extra both DPU and NAV information from quarter presentation slide or financial statement. Even for semi-annual distribution type, you could get the DPU reserved for quarters that have no distritbuion. 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 spreadsheet for analysis, refer below google sheet for 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 import from yahoo finance.

From the above, based on 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 line chart for 5 years range and also candlestick chart (improvised for mean reversion function) to check whether current price is either higher than average, lower than average or close to average.

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

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