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Investing In Ediston Property Investment Company plc (LON:EPIC): What You Need To Know

Kari Hurd

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Ediston Property Investment Company plc is a UK£215m small-cap, real estate investment trust (REIT) based in London, United Kingdom. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. I’ll take you through some of the key metrics you should use in order to properly assess EPIC.

View our latest analysis for Ediston Property Investment

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 EPIC’s daily operations. For EPIC, its FFO of UK£11m makes up 55% of its gross profit, which means over a third of its earnings are high-quality and recurring.

LSE:EPIC Historical Debt, February 22nd 2019

In order to understand whether EPIC 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 EPIC to pay off its debt using its income from its main business activities, and gives us an insight into EPIC’s ability to service its borrowings. With a ratio of 9.7%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take EPIC 10.31 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 EPIC’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 3.54x, it’s safe to say EPIC is generating an appropriate amount of cash from its borrowings.

In terms of valuing EPIC, 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 EPIC’s case its P/FFO is 20.23x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

Ediston Property Investment 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 EPIC:

  1. Future Outlook: What are well-informed industry analysts predicting for EPIC’s future growth? Take a look at our free research report of analyst consensus for EPIC’s outlook.
  2. Management: Who are the people running the company? Experienced management and board are important for setting the right strategy during a volatile market. Take a look at information on EPIC’s executive and directors here.
  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.