Retail Properties of America, Inc. is a US$2.4b mid-cap, real estate investment trust (REIT) based in Oak Brook, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how RPAI’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess RPAI.
Funds from Operations (FFO) is a higher quality measure of RPAI'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 RPAI, its FFO of US$204m makes up 61% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether RPAI 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 RPAI to pay off its debt using its income from its main business activities, and gives us an insight into RPAI’s ability to service its borrowings. With a ratio of 13%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take RPAI 8 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.
I also look at RPAI's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 2.77x, RPAI is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
In terms of valuing RPAI, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In RPAI’s case its P/FFO is 11.8x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
As a REIT, Retail Properties of America offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in RPAI, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for RPAI’s future growth? Take a look at our free research report of analyst consensus for RPAI’s outlook.
- Valuation: What is RPAI 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 RPAI 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.
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