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How Should You Analyze REIT Stock Keppel DC REIT (SGX:AJBU)?

Jenifer Prater

Keppel DC REIT is a S$1.9b small-cap, real estate investment trust (REIT) based in Singapore, Singapore. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of AJBU is unique and it has to adhere to different requirements compared to other non-REIT stocks. Below, I’ll look at a few important metrics to keep in mind as part of your research on AJBU.

View our latest analysis for Keppel DC REIT

A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT’s main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much AJBU actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For AJBU, its FFO of S$118m makes up 103% of its gross profit, which means the majority of its earnings are high-quality and recurring.

SGX:AJBU Historical Debt December 26th 18

In order to understand whether AJBU has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take AJBU to pay off its debt using its income from its main business activities, and gives us an insight into AJBU’s ability to service its borrowings. With a ratio of 20%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take AJBU 4.94 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.

Next, interest coverage ratio shows how many times AJBU’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 8.03x, it’s safe to say AJBU is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at AJBU’s valuation relative to other REITs in Singapore by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. In AJBU’s case its P/FFO is 15.72x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.

Next Steps:

Keppel DC REIT can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I’ve only covered one metric in this article, the FFO, which is by no means comprehensive. I’d strongly recommend continuing your research on the following areas I believe are key fundamentals for AJBU:

  1. Future Outlook: What are well-informed industry analysts predicting for AJBU’s future growth? Take a look at our free research report of analyst consensus for AJBU’s outlook.
  2. Valuation: What is AJBU worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AJBU is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.