Three Cheap REITs?

Real estate investment trusts are known in the market for providing high dividend yields. As such, they can be attractive investment opportunities for income investors. However, at the right prices, REITs can also have the potential for some strong price appreciation.

Over the past 12 months, REITs in Singapore, as represented by the FTSE ST Real Estate Investment Trust Index (SGX: FSTAS8670), have fared rather poorly; the index has dropped by 11.6% to 717 points as compared to the Straits Times Index’s (SGX: ^STI) 5.3% decline to 3,095 points in the same time period.

With the REITs’ falling prices in general, I ran a screen for REITs that were selling at significant discounts to their tangible book value – the tangible book value of a share can be simply understood as the leftover assets that shareholders can lay claim to after the share has theoretically paid off all its liabilities. Such REITs could potentially be at the ‘right prices’ for strong capital gains.

Here are three REITs that filtered through, in no particular order:

1. Suntec REIT (SGX: T82U)

The REIT’s managed by ARA Asset Management and has a focus on prime commercial properties that are located within or in the vicinity of Singapore’s Central Business District. It counts Suntec City and Park Mall under its banner, and also has one-third interests in One Raffles Quay, Marina Bay Financial Towers 1 and 2, and Marina Bay Link Mall.

In addition, the REIT also has a wholly-owned commercial building in North Sydney, Australia, that’s currently under development. As of 31 Dec 2013, Suntec REIT’s managing some S$8.6 billion worth of assets.

With a unit price of S$1.685 currently, the REIT has a tangible book value per unit that’s 26% higher at S$2.13 and a trailing distribution yield of 5.5%.

2. Frasers Commercial Trust (SGX: ND8U)

The aptly-named commercial property REIT has a portfolio that’s based in Singapore and Australia. In the latter country, it owns the Caroline Chisholm Centre and Centre Park, which are valued at S$614 million as of 31 Dec 2013; in Singapore, it has China Square Central, Alexandra Technopark and 55 Market Street in its portfolio and they are collectively worth S$1.17 billion.

These properties help Frasers Commercial Trust attain a tangible book value per unit of S$1.56, which is 25% more than its current price of S$1.25 per unit. The REIT’s units also carry a distribution yield of 6.6% based on its distributions over the last 12 months.

3. Starhill Global Real Estate Investment Trust (SGX: P40U)

Frequent visitors to Singapore’s Orchard Road shopping belt would be familiar with Starhill Global REIT’s handiwork given that it owns Wisma Atria and Ngee Ann City in that area. Besides those two properties, the REIT also has a portfolio that spans Australia, Malaysia, Japan, and China. All told, Starhil Global REIT has a total of 13 retail and commercial properties in five countries that are worth a combined S$2.85 billion with almost three-quarters of that value coming from Wisma Atria and Ngee Ann City.

Given that the REIT’s currently selling for S$0.775 per unit, this translates into: 1) a 19% discount from its tangible book value per unit of S$0.92 and; 2) a historical distribution yield of 6.5%.

Foolish Bottom Line

These REITs look cheap on the basis of having yields higher than the market average (the Straits Times Index has a yield of around 2.8%) in addition to having unit prices that are considerably lower than their tangible book value.

But, that’s no guarantee that these REITs will prove to be bargains for investors in the future. That’s because we would still have to determine if the assets on their balance sheets are carried at inflated values. In addition, some thought also has to go into whether these assets might produce lower cash flows or see reduced rents; such a situation can easily cause the REITs’ assets to lose its value.