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You May Have Been Looking At Capital & Regional Plc (LON:CAL) All Wrong

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Capital & Regional Plc is a UK£116m 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. Below, I'll look at a few important metrics to keep in mind as part of your research on CAL.

Check out our latest analysis for Capital & Regional

Funds from Operations (FFO) is a higher quality measure of CAL's earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For CAL, its FFO of UK£33m makes up 59% of its gross profit, which means the majority of its earnings are high-quality and recurring.

LSE:CAL Historical Debt, July 19th 2019
LSE:CAL Historical Debt, July 19th 2019

In order to understand whether CAL 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 CAL to pay off its debt using its income from its main business activities, and gives us an insight into CAL’s ability to service its borrowings. With a ratio of 6.7%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take CAL 15 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 CAL’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 2.03x, CAL 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 CAL's valuation relative to other REITs in United Kingdom 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. CAL's price-to-FFO is 3.52x, compared to the long-term industry average of 16.5x, meaning that it is highly undervalued

Next Steps:

In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Capital & Regional can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:

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

  2. Valuation: What is CAL 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 CAL 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.