Alexander's, Inc. is a US$2.0b small-cap, real estate investment trust (REIT) based in Paramus, United States. 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 ALX.
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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 ALX 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 ALX, its FFO of US$74m makes up 53% of its gross profit, which means over a third of its earnings are high-quality and recurring.
In order to understand whether ALX 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 ALX to pay off its debt using its income from its main business activities, and gives us an insight into ALX’s ability to service its borrowings. With a ratio of 6.3%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take ALX 15.8 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 ALX’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 1.75x, ALX 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 ALX, 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 ALX’s case its P/FFO is 27.02x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
As a REIT, Alexander's offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in ALX, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for ALX’s future growth? Take a look at our free research report of analyst consensus for ALX’s outlook.
- Valuation: What is ALX 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 ALX 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.
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