How To Look At New Century Real Estate Investment Trust (HKG:1275)

New Century Real Estate Investment Trust is a HK$1.5b small-cap, real estate investment trust (REIT) based in Central, Hong Kong. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how 1275’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 1275.

View our latest analysis for New Century Real Estate Investment Trust

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 1275’s daily operations. For 1275, its FFO of CN¥106m makes up 47% of its gross profit, which means over a third of its earnings are high-quality and recurring.

SEHK:1275 Historical Debt, August 23rd 2019
SEHK:1275 Historical Debt, August 23rd 2019

In order to understand whether 1275 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 1275 to pay off its debt using its income from its main business activities, and gives us an insight into 1275’s ability to service its borrowings. With a ratio of 4.8%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take 1275 21 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 1275’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 1.05x, 1275 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 1275, 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 1275’s case its P/FFO is 12.68x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.

Next Steps:

As a REIT, New Century Real Estate Investment Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in 1275, I highly recommend taking a look at other aspects of the stock to consider:

  1. Future Outlook: What are well-informed industry analysts predicting for 1275’s future growth? Take a look at our free research report of analyst consensus for 1275’s outlook.
  2. Valuation: What is 1275 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 1275 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.

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