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Saturday, August 17, 2019

REITs Valuation

Previously, I shared about Quantifying REITs Fundamental, which we analyze REIT as a whole and come out a factor value, instead of using common filtering method for REITs selection. For this post, let's explore how can we make use of those factors for REITs Valuation.
Before we start, let's go through again some common methods for REITs valuation:
i) Reversion to Mean Approach
- This is a concept in which stock price would move back to its long term average price, over time. Instead of solely look at "price", investors look at metrics like historical P/NAV, historical dividend yield or historical yield spread for the mean price. For detail, you could refer to my previous post, Relative Valuation for REITs

ii) Dividend Discount Model, DDM
As REIT is more for income play, dividend discount model (DDM) is more suitable than discounted cash flow method. This is based on the concept that stock intrinsic value is sum of future dividends which discounted back to present value. For detail, you could refer to The Babylonians - Using Dividend Discount Model in REITs.

iii) Net Asset Value (NAV) Approach
This method is using the NAV to value a REIT. E.g. a price lower than net asset value is considered cheap where as price higher than NAV is considered expensive. You can read more from Investopedia - Is NAV the best way to assess the value of a REIT?

iv) Technical Analysis
This method analyze the past price and volume movement to forecast future price direction. This can be done through candlestick chart and multiple indicators. You could refer the following sites which have preset indicators for buy/sell/neutral.
1) Trading View
2) MarketScreener
3) Investing.com
If you haven't read my previous post of Quantifying REITs Fundamental,  now will be the time before you continue. Let's refer back to previous examples where we get the following factors:
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

Now, convert the above factor to %, whereby 0 value equal to 100%. It would look like below, let's call it yield factor:
i) Far East Hospitality Trust = 114.5%
ii) Keppel DC REIT = 67%
iii) Manulife US REIT = 96%
iv) Parkway Life REIT = 78.5%
v) Starhill Global REIT = 109.5

Next, we will set a benchmark yield and min. yield for each REIT sector. Benchmark yield is the yield that we would like to have if a REIT fundamental is within our expectation. Minimum yield is our required minimum yield irregardless of how perfect the REIT is.
Sector
Minimum Yield
Benchmark Yield
Healthcare
5
5.5
Retail
5.5
6
Office
6
6.5
Hospitality
6.5
7
Industrial
7
7.5
Logistics
7
7.5
* for educational purpose only, different people would have different requirement

As some REITs get income from different sector, so we would need to calculate the benchmark yield with its sector contribution %.
REIT
Hospitality
Retail
Office
Industrial
Healthcare
Minimum Yield
Benchmark Yield
Far East Hospitality Trust
81%
13%
6%


6.34%
6.84%
Keppel DC REIT



100%

7%
7.5%
Manulife US REIT


100%


6%
6.5%
Parkway Life REIT




100%
5%
5.5%
Starhill Global REIT

87%
13%


5.57%
6.07%

Next, we multiply the benchmark yield with yield factor to get target yield; then divide DPU with target yield to get target price.
REIT
Yield Factor
Target Yield
Past Year DPU
Target Price
Far East Hospitality Trust
114.5%
7.83%
3.87 cents
$0.495
Keppel DC REIT
 67%
7%
7.55 cents
$1.08
Manulife US REIT
 96%
6.24%
6.08 cents
$0.975
Parkway Life REIT
 78.5%
5%
13.06 cents
$2.62
Starhill Global REIT
 109.5%
6.65%
4.48 cents
$0.675
* Not a buy/sell recommendation, for educational purpose only

Please do not perform any transaction based on the above examples. The above is just my personal idea without any backtest. Moreover, different people would have different criteria and yield requirement. I've also found my idea is very similar to Reality Inversion - Decomposing Dividend Yield, you could refer to his post for more detail. Hope the above sharing is useful to you all. 

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