In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
alstria office REIT-AG is a €2.5b mid-cap, real estate investment trust (REIT) based in Hamburg, Germany. 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. In this commentary, I'll take you through some of the things I look at when assessing AOX.
View our latest analysis for alstria office REIT-AG
Funds from Operations (FFO) is a higher quality measure of AOX'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 AOX, its FFO of €119m makes up 70% 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 AOX 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 8.8%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take AOX 11.35 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 AOX’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 3.94x, it’s safe to say AOX is generating an appropriate amount of cash from its borrowings.
In terms of valuing AOX, 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. AOX's price-to-FFO is 21.2x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Next Steps:
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. alstria office REIT-AG 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: