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Lippo Malls Indonesia Retail Trust is a S$573m small-cap, real estate investment trust (REIT) based in Singapore, Singapore. 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. I’ll take you through some of the key metrics you should use in order to properly assess D5IU.
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Funds from Operations (FFO) is a higher quality measure of D5IU'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 D5IU, its FFO of S$142m makes up 92% of its gross profit, which means the majority of its earnings are high-quality and recurring.
D5IU'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 D5IU 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 21%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take D5IU 4.78 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
I also look at D5IU'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 4.09x, it’s safe to say D5IU is generating an appropriate amount of cash from its borrowings.
In terms of valuing D5IU, 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 D5IU’s case its P/FFO is 4.01x, compared to the long-term industry average of 16.5x, meaning that it is highly undervalued
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. Lippo Malls Indonesia Retail Trust 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: