REITs Valuation: Price to Book Ratio

Updated: Sep 17, 2019



Price is what you pay, value is what you get – Warren Buffet

In investment, price and value are both critical parameters that you should take note of. Without knowing the intrinsic value or net asset value of a company, you would be clueless about what is the fair value that you should pay.


In general, REITs will re-value its assets once a year. While REITs are asset-backed with a portfolio of properties, it is essential for investors to monitor the net asset value closely.



What is Net Asset Value (NAV)?


NAV is the total assets minus total liabilities.

For example, if a REIT has total assets of $10 million and total liabilities of $3 million, then its NAV is $7 million. You may have heard of shareholders' values or book value, and all these terms carry the same meaning as NAV.


In property investing, NAV is equivalent to the market value of the property. As a savvy investor, you might only want to buy the property if the selling price is below the market value (undervalued). If the selling price is above the market value (overvalued), you might want to think twice on the investment as it is "expensive" based on the valuation.


The same principle applies to REITs investing as well. We will only buy a REIT if it is undervalued and sell when it is overvalued.



Price to book ratio (PB)


PB is a ratio that compared share price with NAV per share.


A price to book ratio of 1 indicates a fair valuation as a REIT's share price is equal to its NAV per share.


A price to book ratio of 2 indicates that a company is overvalued as the share price of a company is twice its NAV per share. Investors should be cautious as this would mean high risk with possible correction.


A price-to-book ratio of 0.5 indicates that a company is undervalued as the share price is only half its NAV per share. This could be an investment opportunity as the share price is trading at a bargain to its NAV per share.



Using PB effectively in REITs investing


Extremely bullish or bearish market

REITs are likely trading at extremely high PB during a bullish market and extremely low PB during a bearish market. During a bullish market, investors should consider some profit-taking. While a bearish market would indicate a potential investment opportunity. Our portfolio rebalancing strategy is proven to outperform the market returns and help investors to rebalance the portfolio strategically.


Portfolio Rebalancing Strategy


Cyclical REITs

Industrial, retail, hospitality and office REITs are considered as cyclical REITs. When the respective cycle is bearish, the REITs is very likely to be traded at low PB (a substantial discount to its NAV per share) for a period of time. PB will not be a good indicator for REITs selection in this case. However, it still can be used to select the best or cheapest REIT within the same sector.


Using historical PB as a guide

By using the REITs' historical PB, investors will have a better understanding of how the market priced the REIT in the past.


Source: Maybank Kim Eng Research Report


For example, the figure above showed the historical PB ratio of Manulife US REIT. It is currently trading near the upper band, +1 standard deviation above its historical average. In other words, it is slightly expensive as compared to its historical PB trend.



Summary


PB is a critical financial ratio in REITs investing. While it can be used as an indicator to determine whether the REITs is under or overvalued, it should not be used as the only indicator on REITs selection. An investor should also consider other parameters, for example, dividend yield, quality of the assets as well as capable REITs management that acts in the interest of investors. We will discuss in more details in the upcoming posts.

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