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Why You Shouldn’t Look At Saul Centers Inc’s (NYSE:BFS) Bottom Line

Saul Centers Inc is a US$1.63b small-cap, real estate investment trust (REIT) based in Bethesda, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how BFS’s business operates and also how we should analyse its stock. Below, I’ll look at a few important metrics to keep in mind as part of your research on BFS.

View our latest analysis for Saul Centers

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 BFS’s daily operations. For BFS, its FFO of US$103.5m makes up 60.3% of its gross profit, which means the majority of its earnings are high-quality and recurring.

NYSE:BFS Historical Debt September 27th 18

In order to understand whether BFS 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 BFS to pay off its debt using its income from its main business activities, and gives us an insight into BFS’s ability to service its borrowings. With a ratio of 10.8%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take BFS 9.28 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 BFS’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 2.19x, BFS 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 BFS’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. In BFS’s case its P/FFO is 15.61x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.

Next Steps:

Saul Centers 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 BFS:

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

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.