Tritax Big Box REIT plc is a UK£2.5b mid-cap, real estate investment trust (REIT) based in London, United Kingdom. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how BBOX’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 BBOX.
A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT's main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much BBOX actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For BBOX, its FFO of UK£94m makes up 71% of its gross profit, which means the majority of its earnings are high-quality and recurring.
BBOX'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 BBOX 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 11%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take BBOX 8.73 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 BBOX’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 4.32x, it’s safe to say BBOX is generating an appropriate amount of cash from its borrowings.
In terms of valuing BBOX, 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 BBOX’s case its P/FFO is 27.11x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Tritax Big Box REIT can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:
- Future Outlook: What are well-informed industry analysts predicting for BBOX’s future growth? Take a look at our free research report of analyst consensus for BBOX’s outlook.
- Valuation: What is BBOX 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 BBOX 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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