Two indicators to evaluate a REIT

Motley Fool Singapore Bureau,2019 year 5 month 31 day post article

REITs (Real Estate Investment Trusts) are popular among dividend stock investors.

Income from real estate rentals held by REITs is paid to investors in the form of distributions, just like stock dividends.

For a REIT to be listed, the REIT operating company must distribute at least 90% of its taxable income to investors.

Let’s look at two metrics that can be used to assess REITs.

PBR(Price-to-Book Ratio)

PBR is an indicator used to determine whether a REIT is undervalued or overvalued.

It shows how many times the current REIT price is above or below the book value (net asset value). The lower the figure, the cheaper it is considered.

Let’s review a simple example to deepen understanding.

If the book value per share of a REIT is $1, theoretically, if you sold all assets, investors could recover $1.

And if investors can buy the REIT for less than $1, it implies a profit.

This is because you are paying less than the asset’s value.

For example, a REIT trading at $0.90 per share with a book value of $1 would have a PBR of 0.9.

In other words, investors are getting $1-worth of assets for $0.90.

However, the opposite can also occur; if investors pay above the book value, they may be overpaying for the asset.

Dividend Yield

Another measure is the dividend yield (equivalent to stock dividend yield). Since REITs distribute at least 90% of their taxable income to investors, the dividend yield can be a good valuation metric.

Assuming REIT assets generate steady income year after year, the only factor affecting the yield is the REIT price in the market.

For example, if a REIT pays a consistent annual dividend of 5 cents per share and the price per share is $1, investors would have a 5% dividend yield.

If the price falls to $0.90, the yield would rise to 5.6%.

Investors can confirm the consistency of REIT dividend payments by looking at data from the past 5 to 10 years.

Comparing past dividend yields to current yields helps investors determine whether a REIT is overvalued or undervalued.

Investors can quickly evaluate whether a REIT is attractive using these two indicators.

If these two indicators are compelling, it is worthwhile to delve deeper.

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