Is LXI REIT plc (LON:LXI) A Healthy REIT?
LXI REIT plc is a UK£414m small-cap, real estate investment trust (REIT) based in London, United Kingdom. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how LXI’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 LXI.
See our latest analysis for LXI REIT
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 LXI’s daily operations. For LXI, its FFO of UK£2.2m makes up 29% of its gross profit, which is relatively low, given most REITs’ earnings are predominantly high-quality and recurring funds from operations.
In order to understand whether LXI 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 LXI to pay off its debt using its income from its main business activities, and gives us an insight into LXI’s ability to service its borrowings. With a ratio of 2.3%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take LXI 42.71 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 LXI’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 2.38x, LXI 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 LXI, 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 LXI’s case its P/FFO is over 100x, well-above the long term industry average valuation of 16.5x. Needless to say LXI is highly overvalued.
Next Steps:
As a REIT, LXI REIT offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in LXI, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for LXI’s future growth? Take a look at our free research report of analyst consensus for LXI’s outlook.
Valuation: What is LXI 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 LXI 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.
