Investing In Parkway Life Real Estate Investment Trust (SGX:C2PU): What You Need To Know
Parkway Life Real Estate Investment Trust is a S$1.6b small-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 C2PU 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 C2PU.
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A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT’s main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much C2PU actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For C2PU, its FFO of S$81m makes up 88% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether C2PU 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 C2PU to pay off its debt using its income from its main business activities, and gives us an insight into C2PU’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 C2PU 7.97 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 C2PU’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 10.15x, its safe to say C2PU is producing more than enough funds to cover its upcoming payments.
In terms of valuing C2PU, 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. C2PU’s price-to-FFO is 19.41x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.
Next Steps:
Parkway Life 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 C2PU:
Future Outlook: What are well-informed industry analysts predicting for C2PU’s future growth? Take a look at our free research report of analyst consensus for C2PU’s outlook.
Valuation: What is C2PU 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 C2PU 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 editorial-team@simplywallst.com.
