What You Need To Know Before Investing In LXI REIT plc (LON:LXI)

LXI REIT plc is a UK£670m small-cap, real estate investment trust (REIT) based in London, United Kingdom. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how LXI’s business operates and also how we should analyse its stock. In this commentary, I’ll take you through some of the things I look at when assessing LXI.

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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 LXI 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 LXI, its FFO of UK£20m makes up 91% of its gross profit, which means the majority of its earnings are high-quality and recurring.

LSE:LXI Historical Debt, July 26th 2019
LSE:LXI Historical Debt, July 26th 2019

In order to understand whether LXI 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 LXI to pay off its debt using its income from its main business activities, and gives us an insight into LXI’s ability to service its borrowings. With a ratio of 12%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take LXI 9 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 LXI’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 5.91x, it’s safe to say LXI is generating an appropriate amount of cash from its borrowings.

In terms of valuing LXI, 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 LXI’s case its P/FFO is 34.25x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

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. LXI REIT 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 LXI’s future growth? Take a look at our free research report of analyst consensus for LXI’s outlook.
  2. Valuation: What is LXI 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 LXI 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.