Analysis - Investors' perception of Market Cap and Gearing Ratio

In my previous post, we looked at the relationship between P/B and ICR and saw an expected trend. From there, we extended the idea to see how the plot could be potentially used as a judge of relative value between REITs. See the post here.

Aside from this, I also checked out general trends for Market Cap (MC) and Gearing Ratio (GR) in a guest post on REIT-tirement's blog, here. He kindly provided the dataset used in this post as well.

In today's post, we look again at how investors perceive common metrics.

Market Cap

Market Cap (MC) is derived from multiplying the current market price by the total shares outstanding. In the previous post, I was unable to look at this metric, as I used P/B ratio as the proxy to investors' perception (see the footnote of this post for my reasoning). 

Now, we change it up, and will be using Dividend Yield as a proxy to investors' relative confidence/perception of each REIT instead. A higher yield corresponds to lower confidence in the REIT, vice versa.

Each plot focuses on one REIT type (healthcare, hospitality, industrial, logistics, office, retail) with the primary component used for hybrid REITs.

For the most part, we see an inverse relationship, meaning that investors are more confident in REITs with a larger MC. This seems logical, as a higher MC improves stability (from diversification) and increases visibility to funds amongst other intangible benefits.

The hospitality segment is the outlier here, but after checking with REIT-tirement, it's suspected that this is due to some of the REITs not reporting the full extent of COVID related impact yet. As such, I pulled data from a more stable, pre-COVID period (Q2 2019), and see the expected inverse relationship again. 

As with the previous post, we can again make some assumptions and get some "undervalued" or "overvalued" calls if we look at these 2 metrics alone. Of course, REITs are more than their MC, but you get the point.

Gearing Ratio

We plot Gearing Ratio with Yield now, for the following results.

Clearly, there is no discernable trends here. This is because Gearing Ratio is much less clear cut to evaluate. 

1. A good execution involving low cost debt and high yield assets puts a high GR in a positive light. The opposite, with high interest debt and low yield assets would be seen negatively as a bad use of leverage.

2. Having a high gearing ratio close to the 50% limit might not restrict a REIT's acquisition potential, as the REIT can always raise funds with rights issue and/or preferential offerings, albeit with some slight delays.


While there are no mind-blowing insights here, I hope that our understanding about the pros and cons of Market Cap and Gearing Ratio can be substantiated and made more convincing by comparing theory with actual market data

Investors can also consider using the plots to provide a multi-faceted look at relative valuation between REITs, which could be useful as part of the decision making process.



Author's note:

This should be the end of the short series of related analysis. I will likely be looking at other kinds of analysis in the future, but if you find this insightful and have other ideas for me to investigate, do let me know.

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