Analysis - Investors' perception of ICR

In this post, I will be looking at some of the common metrics used in REITs, and trying to see if there's any trends that can be explained, or any insights that can be derived from them.


In particular, I will be looking at:

1. Price/Book Ratio (P/B) 

Book Value is also known as tangible net asset value. A P/B greater than 1 corresponds to the market pricing the company at a premium.

The initial premise for this that P/B is a direct and popular metric used by investors to value and compare between REITs, seeing that the ratio is directly exposed to market forces. Thus, we use it as a judge of investors' confidence in a REIT, or basically what relative value they ascribe to it. 

2. Interest Coverage Ratio (ICR)

ICR measures how many times a company can cover it's borrowing expenses with it's current earning. 

In contrast to P/B, ICR is not directly affected by live share prices, and so in this post, I will describe it as an intrinsic fundamental metric. 


With the context set right, and with a variable for investor perception (P/B) and one for intrinsic metrics (ICR), we can now proceed to look at the relationships.

We see a clear direct relationship between P/B and ICR. This is expected, as a higher ICR reflects a stronger ability for the REIT to pay back and manage her debt, which should give investors more confidence as reflected in P/B.

If we were to just focus on these two metrics alone, one could say, albeit naively, that MIT is undervalued compared to MLT, as it is awarded a similar P/B ratio for a higher ICR value. 

Extending that to a general statement, we can hand-wave and say that those counters above the best fit line are potentially "undervalued".


With the above plot, interested investors can take a close look in the supposedly relatively "undervalued" REITs and see if the do indeed see value in investing in them. I hope this post has added some value to your investing journey! Please drop me a message if there's other things you'd like me too look at, or for general feedback.

Special thanks for REIT-tirement, for providing the data used in this analysis.


Author's note:

In the first draft of this post, I wanted to take a look at Market Cap vs P/B as well, to see if the same idea can be generalized from ICR vs P/B. However, I came to realize that because Market Cap and P/B both share "market price" in the numerator, the plot effectively only shows the relationship between "outstanding shares" and "inverse book value". With "market price" taken out of the equation, the plot would no longer meaningfully reflect investors' pricing/perception.

Anyway, I have included the plot below for those who are interested, although I caution that one should not draw any concrete conclusions from this.

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