The late Benjamin Graham, author of the “The Intelligent Investor” and mentor to Warren Buffett, prescribed buying stocks that trade at a discount to their book values.
In theory, buying a stock that trades at a discount to its book value is akin to buying a $1 coin for less than a dollar. Investors will reap a return when the market realises the discrepancy or when the company liquidates its assets and returns it to shareholders. The method of valuation is especially useful for real estate investment trusts (REITs) since they mostly have tangible assets on their books. This means that their assets can likely be sold for their carrying book value. I have been tracking the cheapest REITs in Singapore for a few months now. Here are three REITs that, at current prices, trade at the biggest discount to book value. (I am excluding Fortune Real Estate Investment Trust (SGX: F25U) which will be delisted in Singapore)
Dasin Retail Trust (SGX: CEDU) is a China-focused retail REIT. At its current price of S$0.86, Dasin trades at a 36% discount to its net asset value per share and sports an annualised yield of 7.8% (based on its 2019 first six month results).
The REIT is perhaps trading at a big discount due to a variety of factors. For one, its portfolio has a relatively low asset yield. Moreover, minority shareholders are currently enjoying artificially higher distribution per unit (DPU) as two major shareholders have waived off part of their distribution entitlement. The distribution waiver will fall away completely in 2022, which will have a big negative impact on DPU.
The next cheapest REIT in the market is OUE Commercial Real Estate Investment Trust (SGX: TS0U), which trades 25% below its book value per unit.
The REIT currently owns OUE Bayfront, One Raffles Place and OUE Downtown Office in Singapore, as well as Lippo Plaza in Shanghai.
OUE Commercial REIT unitholders recently approved the proposed acquisition of OUE Hospitality Trust (SGX: SK7). The scheme consideration includes S$0.040705 in cash plus the issuance of 1.3583 new units per OUE Hospitality Trust stapled security. The expected last day of trading for OUE Hospitality Trust stapled securities is on September 12.
Following the acquisition, Crowne Plaza Changi Airport Hotel, Mandarin Orchard Singapore and Mandarin Gallery, which are currently owned by OUE Hospitality Trust, will be integrated into OUE Commercial REIT’s portfolio.
Completing the list is Far East Hospitality Trust (SGX: Q5T), which trades at a 25% discount to its book value. The hospitality trust, which owns nine hotels and four serviced residences in Singapore, saw a 9.9% fall in distribution per stapled security in the second quarter of 2019.
Its portfolio was hampered by a decline in average occupancy and average daily rate by 1.7 percentage points and 2.6% respectively. Management cited a lower volume of business travel and the absence of major events compared to 2018, such as the 2018 Singapore Airshow and the North Korea-United States Singapore summit.
I should also caution that Far East Hospitality Trust has one of the highest gearing ratios among S-REITs at 39.8%, which could limit its capacity to fund yield-accretive investments.
On the bright side, hotel room supply is expected to taper this and next year, which could provide some relief.
The Foolish bottom line
The price-to-book ratio is just one aspect to consider. As you can see, numerous other factors can impact a REIT’s overall expected return. This includes asset and distribution yield, gearing, and industry outlook. All of which should play a part in your investment analysis of a REIT.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia does not own shares in any companies mentioned.