How I value a REIT

One of the very first stock I bought was Far East Hospitality Trust. (SGX:C61U). With my first stocks, I wanted to be really safe so that I would not get discouraged in the first play. For me that’s important.

Here are my criterias on which I value a REIT in order of priority.

  1. The REIT Price is Undervalued. (Price / NAV < 80%).
  2. Dividend Yield (> 7%)
  3. Gearing Ratio (< 40%)
  4. Interest Coverage Ratio (> 5)
  5. Consistent Growth in Free Cash Flow & DPU (5-10 years)
  6. NPI Yield (NPI / Revenue > 95%)

In my real life example, I bought Q5T on 5 Feb 2016 @ S$0.645. At that time, Price/NAV was about 0.665. Yield was 7.25%. Gearing was 32.5% and Interest coverage ratio was 5.6. There was consistent DPU since the start of the Trust. However NPI yield was at 90%. This demands a closer look in the future, but for now, I am OK with it.