Asset Plus Limited is a NZ$97m small-cap, real estate investment trust (REIT) based in Auckland, New Zealand. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of APL is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess APL.
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 APL 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 APL, its FFO of NZ$6.5m makes up 55% of its gross profit, which means the majority of its earnings are high-quality and recurring.
Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for APL to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take APL 7.01 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 APL'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 2.32x, APL 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 APL's valuation relative to other REITs in New Zealand 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. APL's price-to-FFO is 14.78x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.
As a REIT, Asset Plus offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in APL, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for APL’s future growth? Take a look at our free research report of analyst consensus for APL’s outlook.
Valuation: What is APL 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 APL 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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