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Ascendas Real Estate Investment Trust is a S$9.1b mid-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 A17U is unique and it has to adhere to different requirements compared to other non-REIT stocks. In this commentary, I'll take you through some of the things I look at when assessing A17U.
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of A17U’s daily operations. For A17U, its FFO of S$612m makes up 103% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether A17U 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 A17U to pay off its debt using its income from its main business activities, and gives us an insight into A17U’s ability to service its borrowings. With a ratio of 15%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take A17U 6.69 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 A17U’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 4.55x, it’s safe to say A17U is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at A17U'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. A17U's price-to-FFO is 14.83x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.
Ascendas Real Estate Investment Trust 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 A17U:
- Future Outlook: What are well-informed industry analysts predicting for A17U’s future growth? Take a look at our free research report of analyst consensus for A17U’s outlook.
- Valuation: What is A17U 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 A17U 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.