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You May Have Been Looking At Acadia Realty Trust (NYSE:AKR) All Wrong

Simply Wall St

Acadia Realty Trust is a US$2.4b mid-cap, real estate investment trust (REIT) based in Rye, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how AKR’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 AKR.

See our latest analysis for Acadia Realty Trust

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 AKR 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 AKR, its FFO of US$96m makes up 50% of its gross profit, which means over a third of its earnings are high-quality and recurring.

NYSE:AKR Historical Debt, August 27th 2019

AKR's financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky AKR is, broadly speaking, to have debt on its books. The metric I'll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 5.9%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take AKR 17 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 AKR'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 1.37x, AKR is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

I also use FFO to look at AKR's valuation relative to other REITs in United States 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. AKR's price-to-FFO is 25.02x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

As a REIT, Acadia Realty Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in AKR, I highly recommend taking a look at other aspects of the stock to consider:

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