Benjamin Graham, author of the “The Intelligent Investor” and mentor to legendary investor Warren Buffett, was a keen believer of investing in securities with a low price-to-book ratio. The price-to-book ratio or PB ratio is a comparison between how much one is paying for the security and its net asset value. In theory, buying a stock that trade at a discount to its book value is like buying a $1 coin for less than a dollar. Investors would be able to reap a return when the market realises the discrepancy and raises the share price to its fair value. This…
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Benjamin Graham, author of the “The Intelligent Investor” and mentor to legendary investor Warren Buffett, was a keen believer of investing in securities with a low price-to-book ratio. The price-to-book ratio or PB ratio is a comparison between how much one is paying for the security and its net asset value.
In theory, buying a stock that trade at a discount to its book value is like buying a $1 coin for less than a dollar. Investors would be able to reap a return when the market realises the discrepancy and raises the share price to its fair value. This method of valuation is especially useful for real estate investment trusts (REITs) or companies with largely tangible assets on its books.
With that, here are two REITs with steady distributions that are trading below their book values.
Mapletree North Asia Commercial Trust (SGX: RW0U), formerly known as Mapletree Greater China Commercial Trust, changed its name in May due to acquisitions of six properties in Japan. The acquisitions expanded its global footprint beyond the Greater China region.
There are a few things to like about this trust. For one, its sponsor, Mapletree Investments Pte Ltd, has a long and proven track record of managing and sponsoring REITs in Singapore.
Mapletree North Asia’s Commercial Trust has a solid portfolio in Greater China, which includes Festival Walk (a retail mall in Kowloon Tong, Hong Kong), Gateway Plaza (a Grade A office building in Beijing) and Sandhill Plaza, a business park the REIT acquired in 2015. There has been an increase in rental rates in its properties that have led to growth in distribution per unit from 5.9 Singapore cents in FY13/14 to 7.49 cents in FY17/18.
Moreover, the recent acquisition of the six properties in Japan is expected to be yield-accretive. In the most recent quarter, the trust again delivered growth in its distribution per unit (DPU) by 1.6%.
Its balance sheet also remains healthy with gearing ratio of 38.8% and interest cover of 4.1 times. Although some may argue that the gearing is on the high side, it is still some way away from the 45% regulatory cap.
Currently, the trust trades at S$1.15 per unit, representing a 16.7% discount to its book value and an attractive 6.5% distribution yield.
Fortune Real Estate Investment Trust (SGX:F25U) is perhaps one of my favourite REITs in Singapore. The trust owns a portfolio of 16 suburban malls in Hong Kong and has recently been riding on higher consumption and strong economic growth in the region.
The REIT has a stellar record of consistent DPU growth over the last eight years with DPU more than doubling from 24.35 HK cents in 2010 to 50.78 HK cents in 2017. There was much the same for the first half of 2018 as DPU once again rose 3.2% from a year ago.
It also recently sold Provident Square, its ninth largest mall at an 88% premium to its book value. It used the funds from the sale to pare down its debt, and because of the huge premium on the sale, net asset value rose substantially.
At just 22.3%, Fortune REIT also has the lowest gearing ratio among Singapore REITs. This gives it plenty of debt headroom to make more yield-accretive acquisitions in the future. With interest rates rising, it is also comforting for investors to know that the REIT is not as highly leveraged as its peers.
What caught my eye during the latest earnings results was that the REIT again managed to increase its rents by a staggering 13.6%. This will certainly be a positive impact on gross rental income in the next few quarters. If the trend continues, as management expects, the trust can continue to sustain its strong levels of DPU growth in the future.
At the time of writing, units of Fortune REIT exchanged hands at HK$9.80 per piece. This translates to a price-to-book ratio of just 0.6 and a healthy distribution yield of 5.4%.
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