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AEW UK Long Lease REIT Plc is a UK£72m small-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 AEWL’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess AEWL.
See our latest analysis for AEW UK Long Lease REIT
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 AEWL 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 AEWL, its FFO of UK£2.4m makes up 82% of its gross profit, which means the majority of its earnings are high-quality and recurring.
AEWL’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 AEWL 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 8.2%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take AEWL 12.22 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 AEWL’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 6.19x, it’s safe to say AEWL is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at AEWL’s valuation relative to other REITs in United Kingdom 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. AEWL’s price-to-FFO is 29.21x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Next Steps:
As a REIT, AEW UK Long Lease REIT offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in AEWL, I highly recommend taking a look at other aspects of the stock to consider: