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Should You Invest In Vicinity Centres (ASX:VCX)?

Simply Wall St

Vicinity Centres is a AU$9.7b mid-cap, real estate investment trust (REIT) based in Chadstone, Australia. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how VCX’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 VCX.

View our latest analysis for Vicinity Centres

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 VCX’s daily operations. For VCX, its FFO of AU$662m makes up 70% of its gross profit, which means the majority of its earnings are high-quality and recurring.

ASX:VCX Historical Debt, September 11th 2019

In order to understand whether VCX 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 VCX to pay off its debt using its income from its main business activities, and gives us an insight into VCX’s ability to service its borrowings. With a ratio of 14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take VCX 7 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 VCX’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 3.39x, it’s safe to say VCX is generating an appropriate amount of cash from its borrowings.

In terms of valuing VCX, 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. VCX's price-to-FFO is 14.66x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.

Next Steps:

Vicinity Centres 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 VCX:

  1. Future Outlook: What are well-informed industry analysts predicting for VCX’s future growth? Take a look at our free research report of analyst consensus for VCX’s outlook.
  2. Valuation: What is VCX 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 VCX 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.

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 editorial-team@simplywallst.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.