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Thursday, August 08, 2019

Quantifying REITs Fundamental

Following previous posts on "How to DIY a REITs Data Collection Spreadsheet" and "How to Come Out a Basic REITs Analysis Summary", this time let's see how can we make use of those figures for REIT selection. Some people and paid course provider would have their own checklist for filtering REITs based on criteria, e.g. gearing < 35% or interest cover ratio > 4 times, etc. You could refer following sites for examples:
1) The Morley Fool - REIT Investing Made Simple: A Checklist to Pick Out the Best REITs
2) Lazy Singaporean - How to evaluate and value REITs
3) ZUU Online - Investing in REITs? Understand How to Read These REITs Data First

Instead of filter or select REITs based on common metrics like gearing, interest cover, NAV and others, can we analyze REIT as a whole and quantify its fundamental ? I have found some bloggers employing this idea through way of scorecard, which you could refer their examples below:
1) Passive Peon - A Peon Analysis - Starhill Global REIT
2) T.U.B Investing - The Tech Powerhouse Face-off
Theory without practice is just as incomplete as practice without theory
So let's list out all the quantifiable criteria, refer below spreadsheet:

This may look complicated at first glance, but it is actually simple which based on the following concepts:
- Every criterion consists of 2 rows, 1st row is benchmark setting, 2nd row is corresponding factor. 0 value is is the base for a criterion. Negative value refers to better condition than base benchmark and vice versa. The higher the value, the higher the risk.
- Different criteria will have different importancies, which separated into color red, orange and green. Red being the more important and green being least important. Therefore, red criteria would come with a bigger factor gap compared to green criteria.
- This spreadsheet is only for educational purpose; different people would have different ideas for criteria, factor as well as importancies.
Now, let's try to apply the above criteria to a few SREITs. I have added this at top right part of data collection page. You could choose between different REITs to see its criteria benchmark.

As mentioned above, 0 is the base benchmark for all criteria. In another word, a REIT which performance is within expectation should have a factor of close to 0. If a REIT fundamental is good, then it would have a negative value, the bigger the negative value, the better fundamental. Vice versa, a REIT with undesired fundamental would have a positive value. From the above spreadsheet, we can see factors for the following REITS:
i) Far East Hospitality Trust = +14.5
ii) Keppel DC REIT = -33
iii) Manulife US REIT = -4
iv) Parkway Life REIT = -21.5
v) Starhill Global REIT = +9.5

It seems that Keppel DC REIT fundamental is best among the 5. But should we just buy it at any price ? If no, how could we determine our entry or exit price ? Some common ways are:
i) Reversion to Mean Approach (Relative Valuation for REITs)
ii) Dividend Discount Model, DDM (The Babylonians - Using Dividend Discount Model in REITs)
iii) Net Asset Value Approach
iv) Technical Analysis

Besides the above common ways, could we make use of above total factor for REIT valuation ? I will leave it to another post to explore this area. Finally, if you are interested, you could make a copy of this spreadsheet through here.

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