Reversion to Mean using Net Asset Value

Contributed by: Warriortan, #investforyourself, #reversiontomean

Last week, I published a blog around the use of Reversion to Mean methodology on Dividend Yield to determine entry and exit price for Reits Investments. To my surprise, it was hugely popular and it received the highest number of views I ever have for a single post. Thank you very much.

One of my colleagues suggested to me why don’t I apply this same methodology to Net Asset Value (NAV) or more specifically Price to NAV ratio. Hmm … I haven’t thought of that before.

Growth-300x225His rationale was that Reit tends to trade consistently at a premium or a discount to the Net Asset Value for some specific reasons.

Investors may view certain Reits as being more aggressive or conservative in valuing their assets and thus apply discount or premium accordingly. Some may view Reits with substantial overseas exposure as more risky because the value of assets can change when the exchange rate changes. Therefore, investors tend to apply a discount to it consistently. With this consistency, if we believe in the reversion to mean theory, we can identify moments when the stock price is unusually high or low due to pure investors’ sentiment. Then, we can take advantage of that knowledge to sell into strength or accumulate at moment of weaknesses.

(For those who are interested to learn more about Net Asset Value, please scroll to the bottom of the post)

So, out of curiosity, I went to find out about the price to NAV ratio for the same Reits that I discussed earlier. The results are as follows:

Table 1: Share Price as at close of business 9 May 2017

Share Price ($) Annual DPU (cents/unit) Current NAV (cents/unit)
Ascendas Reit 2.59 15.97 206
CapitaMall Trust 1.96 11.08 189
CapitaRChina 1.57 9.84 158
Fraser Commercial 1.34 10.03 154
SPH Reit 0.985 5.6 94
VIVA ind Trust 0.79 7.17 79.2

Table 2: Current Dividend Yield as a Percentile of last 3 years Historical Yield

Current Div Yield (%) Highest Yield (%) Lowest Yield (%) Current Percentile
Ascendas Reit 6.2% 7.5% 5.0% 47%
CapitaMall Trust 5.7% 6.1% 4.3% 75%
CapitaRChina 6.3% 8.1% 5.8% 20%
Fraser Commercial 7.5% 9.2% 4.9% 60%
SPH Reit 5.7% 6.1% 5.0% 62%
VIVA ind Trust 9.1% 10.4% 8.3% 37%

Table 3: Current Price/NAV as a Percentile of last 3 years Historical Price/NAV

Current Price/NAV Highest Price/NAV Lowest Price/NAV Current Percentile
Ascendas Reit 1.26 1.40 1.02 62%
CapitaMall Trust 1.04 1.23 0.99 18%
CapitaRChina 0.99 1.05 0.74 83%
Fraser Commercial 0.87 1.03 0.75 42%
SPH Reit 1.05 1.17 0.95 45%
VIVA ind Trust 1.00 1.08 0.84 66%

So what are my personal observations?

In general, the percentile for the current dividend yield (see table 2) and current price/NAV (see table 3) with reference to historical numbers move in opposite directions. The higher the percentile for the dividend yield, the lower is the percentile for Price/NAV.

For example, for Capitaland Mall Trust, its percentile for current dividend yield is 75% while for its price/NAV is 18%. The opposite is true for Capitaland Retail China.

This is expected as if the share price goes down,

(a) for the same dividend distribution, the dividend yield will increase

(b) for the same NAV, the price/NAV ratio will be lower

The other observation is that that the current dividend yield and price/NAV are within the brackets of the 3 years historical high and low numbers. Therefore, it lends some weight to this methodology.




So what now?

I think either one of them will do and I tend to lean towards dividend yield because that’s exactly what we are going to get back as an investors. The net asset value is good to know but we cannot extract the value until the company is liquidated and even then, we may or may not be able to get the same value.

The recent Sabana Reit saga taught us a very useful lesson if you recalled what their management said about the values of the assets when the unitholders threatened to liquidate the company. (sharing an article from Business Times on Sabana Reit)

But through this analysis, it reinforces my view that Capitaland Retail China may be overvalued at the moment while Capitaland Mall Trust looks attractive at this current valuation.

As you may recall, my triggers for dividend yield are set at 25th (to sell) and 75th (to buy) percentile where 0th percentile is the lowest dividend yield and 100th percentile is the highest dividend yield for past 3 years.

By the way, I have sold off all my holdings in Viva Industrial Trust when its dividend yield dropped below 25th percentile. The price has indeed come off a bit since then. Let’s see if it would rise above the 50th percentile … that will be the first point that I will start evaluating it as a possible investment again.

Maybe it is time to act again ! 🙂


Have a great investing week folks.


Definition of ‘Net Asset Value’

Definition: Net asset value(NAV) is the value of a fund’s asset less the value of its liabilities per unit.

NAV = (Value of Assets-Value of Liabilities)/number of units outstanding

Other useful websites to learn more about NAV:

(a) From Wikipedia

(b) From Investopedia

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s