Yahoo Finance Why You Shouldn’t Look At AEW UK REIT plc’s (LON:AEWU) Bottom Line
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AEW UK REIT plc is a UK£135m 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. I’ll take you through some of the key metrics you should use in order to properly assess AEWU.
Check out our latest analysis for AEW UK REIT
Funds from Operations (FFO) is a higher quality measure of AEWU’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 AEWU, its FFO of UK£9.3m makes up 76% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether AEWU 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 AEWU to pay off its debt using its income from its main business activities, and gives us an insight into AEWU’s ability to service its borrowings. With a ratio of 18%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take AEWU 5.43 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
I also look at AEWU’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 13.72x, its safe to say AEWU is producing more than enough funds to cover its upcoming payments.
In terms of valuing AEWU, 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 AEWU’s case its P/FFO is 14.59x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.
Next Steps:
As a REIT, AEW UK REIT offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in AEWU, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for AEWU’s future growth? Take a look at our free research report of analyst consensus for AEWU’s outlook.
Valuation: What is AEWU 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 AEWU 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.
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.
