The price-to-book (PB) ratio is a popular way to value a real estate investment trust (REIT).
The P/B ratio is calculated by dividing the market capitalisation of a REIT with its book value, or net asset value. Theoretically, having a P/B ratio that is less than 1 means that a REIT is trading for less than what it’s worth – an investor who buys the REIT could liquidate all its assets, settle all its obligations, and still end up with a profit.
A recent report indicated that the average P/B ratio for Singapore’s REIT universe (the local stock market has 27 REITs and six stapled trusts) was 0.9. The list included five Hotel & Resort REITs, as defined by the Global Industry Classification Standard.
Here’re four quick highlights from the report on the five Hotel & Resort REITs (figures as of 8 June 2016, unless otherwise stated):
- CDL Hospitality Trust (SGX: J85) is the largest of the five with a market capitalisation of S$1.38 billion. It has a P/B ratio of 0.8. The stapled trust is home to 15 hotels, two resorts, and a retail mall. It also offers a distribution yield of 7.6%. Unfortunately, over the past three years, CDL Hospitality Trust’s total return is a negative 8.4%.
- Similarly, Far East Hospitality Trust (SGX: Q5T) has a P/B ratio of 0.7. The stapled trust, which has 12 hospitality properties in its portfolio, offers a distribution yield of 7.0%. But, just like CDL Hospitality Trust, Far East Hospitality Trust has recorded a negative total return over the past three years – the latter’s return was worse though, at -26.1%.
- Elsewhere, Frasers Hospitality Trust (SGX: ACV) trades at a P/B ratio of 0.9. The stapled security hosts 13 properties and offers a 7.8% distribution yield. The trust had its initial public offering in 2014 and is roughly flat in terms of total return over the past year.
- Not all of the Hotel & Resort REITs are trading below their book values. For instance, Ascendas Hospitality Trust (SGX: Q1P) trades at its book value. The stapled trust boasts a slate of 11 hospitality real estate assets located across Asia and Australia. Over the past three years, the trust had clocked a negative total return of 5.5%. The REIT offers an 8.3% distribution yield.
The P/B ratio represents a starting point for investors who are looking for REITs that may be undervalued. Valuation, though, has to be complemented by understanding a REIT’s asset quality, the performance of the REIT’s portfolio in the past, and its future prospects, among other important things.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn't own shares in any company mentioned.