Preferred Apartment Communities Inc is a US$651m small-cap, real estate investment trust (REIT) based in Atlanta, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how APTS’s business operates and also how we should analyse its stock. In this commentary, I’ll take you through some of the things I look at when assessing APTS.
Funds from Operations (FFO) is a higher quality measure of APTS’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For APTS, its FFO of US$86m makes up 45% of its gross profit, which means over a third of its earnings are high-quality and recurring.
APTS’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky APTS is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 4.7%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take APTS 21.36 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
Next, interest coverage ratio shows how many times APTS’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 1.28x, APTS is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
I also use FFO to look at APTS’s valuation relative to other REITs in United States 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. APTS’s price-to-FFO is 7.54x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
Preferred Apartment Communities 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 APTS:
- Future Outlook: What are well-informed industry analysts predicting for APTS’s future growth? Take a look at our free research report of analyst consensus for APTS’s outlook.
- Valuation: What is APTS 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 APTS is currently mispriced by the market.
- 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 firstname.lastname@example.org.