Monday, October 20, 2008

How to Value Reits - Example: Ascott Singapore

SGDividends is on a make investing look so "chicken-feet" that people, large or small, pink or green will be able to invest wisely. The best people that have their best interests at heart is of cos, themselves. See Mr Tan Kin Lian's Blog for examples.

The How-to article we are writing today is drawn from many sources, such as stockfundatalk (check out this blog..its fantastic!), investopedia,wikipedia, our teammates, Analyst reports (yes..we know), textbooks..e.t.c. SGDividends just simplified them and modified them using a Singapore example. So read on ...join us in a quest!

Number 1: Adjusted Funds from Operations (AFFO)

Simply: Net income + Depreciation - Capital Expenditure ( Capex and other expenditure that is needed to sustain the business) = AFFO ( Crude Hokkien for what you mean). This is because real estate asset is different from fixed-plant or equipment assets as property rarely loses value and often appreciates. Therefore, depreciation is added back. We substract Capex as this is a cost that is needed to sustain the business.

Income Statement

Somewhere in the reports

Cash Flow Statement

From the above (000s), 5332 ( Net income,1) + 1304 ( Depreciation,2) - 963(Capex) = 5672

AFFO figure is utterly useless by itself as everything has a price or value (even my ass, its silky and smooth btw). So, we have to take into consideration how much we pay for it and we use the price of a share.And we find the price/AFFO per share which is equal to: $0.5/(5672,000 divided by 607,239,808ABOVE) = 0.019.

This figure is utterly useless by itself again..unless you compare the figures with other Reits.

Number 2:Use Dividend Yield
Simply: Price of a share divided by total annual dividend.(Thanks ZhuangZi for alerting us on the striked out mistake.)Total Dividend divided by the price of a share. See below table. YTD 2008 the distribution per unit(DPU) is 4.52 cents. Since this financial statement is reported for 30 June 2008, this DPU is for the first 6 months. Therefore, 4.52 X2 = 9.04 cents. This is divided by S$0.5 to give a percetage of 18.08%. ( actually, for a faster way to get this figure, just go to SGX-REIT Data to get it.)

Compare with other REITS to see which one pays more. ( past performance though may not be replicated again ....we wanna say)

Number 3:Net Asset Value.

REIT properties are routinely revalued by independent valuers. Obviously the higher the NAV (worth of the property per share), the better. Duh.....This is taken from the financial statements.

Divide the price of the share by $1.57. $0.5( 20/10/2008)/ $1.57 = $0.32. Compare this (also called Price to Book Ratio)with the other REITS.
Number 4: Gearing!

Simply: Just go to this SGX-REIT Data to get this! ( Now thats what we call simplified!)
The higher this ratio, the more risky it is financially as it has borrowed a lot. See the below excerpt from a consultation paper (June 2005) from MAS. The gearing limit is 35% for Singapore REITS unless it has a credit rating of least "A".

Compare this ratio with the other Singapore REITs. The lower this ratio is the better as it is more financially strong and also, it means it is able to do some acquisitions with borrowing since the limit is not reached.

Now you have it! Its CHICKEN FEET, DON'T YOUR THINK!


  1. would like to see some basic intro and dissection of banks and property counters balance sheet as they are 2 different animals from manufacturing/consumers

  2. Ok check back...will do it in time to come. :)

  3. Dude,
    I think for "Number 2:Use Dividend Yield" you meant it the other way round right?

    "Price of a share divided by total annual dividend."

    Should be
    "Total Dividend divided by the price of a share"

  4. the AFFO looks similar to FCFF (Free cash flow to firm), minus the interest portion:

    FCFF = Net income + depreciation + [(1-tax rate)Interest paid] - Capex - [Working capital]

    what's the reason for leaving out interest paid?

    depreciation is added back since it's non-cash.

  5. Hi Zhuagzi,

    Thanks for alerting us on that mistake..have changed it =)

    SGDividends Team No 4

  6. Hi Anonymous,


    FCFF does indeed look similar to AFFO.

    Actually FCFF has a lot of different kinds of ways people define it. So we decided to just make it simple by taking Net Cash from Ops - Capex which we feel is suffice to get a quick and dirty,big picture feel of an investment.

    Regarding your FCFF about adding back [(1-tax rate)Interest paid]. (Seem to have read it somewhere back in our academic days, everything returned already....). Think as long as it makes sense to you just whack.....anyway all formulas are opinions and it is up to us individuals to use what we deem as appropraite after understanding why it is what it is.


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