How To Look At APN Convenience Retail REIT (ASX:AQR)
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APN Convenience Retail REIT is a AU$255m small-cap, real estate investment trust (REIT) based in Melbourne, Australia. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how AQR’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 AQR.
Check out our latest analysis for APN Convenience Retail REIT
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 AQR’s daily operations. For AQR, its FFO of AU$16m makes up 64% of its gross profit, which means the majority of its earnings are high-quality and recurring.
AQR's financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky AQR is, broadly speaking, to have debt on its books. The metric I'll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take AQR 7 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 AQR'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 4.02x, it’s safe to say AQR is generating an appropriate amount of cash from its borrowings.
In terms of valuing AQR, 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. AQR's price-to-FFO is 16.26x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.
Next Steps:
As a REIT, APN Convenience Retail REIT offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in AQR, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for AQR’s future growth? Take a look at our free research report of analyst consensus for AQR’s outlook.
Valuation: What is AQR 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 AQR 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.
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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.
