Is First Real Estate Investment Trust (SGX:AW9U) A Healthy REIT?

First Real Estate Investment Trust is a S$1.06B small-cap real estate investment trust (REIT) based in Singapore, Singapore. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how AW9U’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 AW9U.

View our latest analysis for First Real Estate Investment Trust

Funds from Operations (FFO) is a higher quality measure of AW9U’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 AW9U, its FFO of S$72.37M makes up 73.40% of its gross profit, which means the majority of its earnings are high-quality and recurring.

SGX:AW9U Historical Debt Feb 27th 18
SGX:AW9U Historical Debt Feb 27th 18

In order to understand whether AW9U 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 AW9U to pay off its debt using its income from its main business activities, and gives us an insight into AW9U’s ability to service its borrowings. With a ratio of 15.17%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take AW9U 6.59 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 AW9U’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 3.94x, it’s safe to say AW9U is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at AW9U’s valuation relative to other REITs in Singapore by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. AW9U’s price-to-FFO is 14.69x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.

Next Steps:

As a REIT, First 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 AW9U, 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 AW9U’s future growth? Take a look at our free research report of analyst consensus for AW9U’s outlook.
  2. Valuation: What is AW9U 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 AW9U 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.