You May Have Been Looking At intu properties plc (LON:INTU) All Wrong

intu properties plc is a UK£2.88B mid-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. In this commentary, I’ll take you through some of the things I look at when assessing INTU.

See our latest analysis for intu properties

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 INTU 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 INTU, its FFO of UK£140.90M makes up 33.04% of its gross profit, which means over a third of its earnings are high-quality and recurring.

LSE:INTU Historical Debt Feb 27th 18
LSE:INTU Historical Debt Feb 27th 18

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 INTU 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 2.64%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take INTU 38 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 INTU’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 0.76x, INTU is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

In terms of valuing INTU, 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 INTU’s case its P/FFO is 20.21x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

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