Pennsylvania Real Estate Investment Trust is a US$780.94M small-cap real estate investment trust (REIT) based in Philadelphia, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how PEI’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 PEI.See our latest analysis for Pennsylvania 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 PEI’s daily operations. For PEI, its FFO of US$136.41M makes up 57.81% of its gross profit, which means the majority of its earnings are high-quality and recurring.
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 PEI 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 8.23%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take PEI 12 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 PEI’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 2.33x, PEI is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
I also use FFO to look at PEI’s valuation relative to other REITs in United States 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. PEI’s price-to-FFO is 5.7x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
Next Steps:As a REIT, Pennsylvania 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 PEI, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for PEI’s future growth? Take a look at our free research report of analyst consensus for PEI’s outlook.
- Valuation: What is PEI 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 PEI is currently mispriced by the market.
- 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.