How To Look At Link Real Estate Investment Trust (HKG:823)

Link Real Estate Investment Trust is a HK$185b large-cap, real estate investment trust (REIT) based in Kowloon City, Hong Kong. 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. Below, I'll look at a few important metrics to keep in mind as part of your research on 823.

See our latest analysis for Link 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 823’s daily operations. For 823, its FFO of HK$6.5b makes up 83% of its gross profit, which means the majority of its earnings are high-quality and recurring.

In order to understand whether 823 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 823 to pay off its debt using its income from its main business activities, and gives us an insight into 823’s ability to service its borrowings. With a ratio of 22%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take 823 4.48 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.

Next, interest coverage ratio shows how many times 823’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 10.65x, its safe to say 823 is producing more than enough funds to cover its upcoming payments.

In terms of valuing 823, 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. 823's price-to-FFO is 28.48x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

As a REIT, Link 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 823, 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 823’s future growth? Take a look at our free research report of analyst consensus for 823’s outlook.
2. Valuation: What is 823 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 823 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.