Yahoo Finance Investing In Property Through Melcor Real Estate Investment Trust (TSE:MR.UN)
Melcor Real Estate Investment Trust is a CA$215m small-cap, real estate investment trust (REIT) based in Edmonton, Canada. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of MR.UN is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess MR.UN.
Check out our latest analysis for Melcor Real Estate Investment Trust
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 MR.UN’s daily operations. For MR.UN, its FFO of CA$12m makes up 29% of its gross profit, which is relatively low, given most REITs' earnings are predominantly high-quality and recurring funds from operations.
In order to understand whether MR.UN has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take MR.UN to pay off its debt using its income from its main business activities, and gives us an insight into MR.UN’s ability to service its borrowings. With a ratio of 3.1%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take MR.UN 33 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 MR.UN’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 0.45x, MR.UN is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
I also use FFO to look at MR.UN's valuation relative to other REITs in Canada 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. In MR.UN’s case its P/FFO is 18.1x, compared to the long-term industry average of 16.5x, meaning that it is slightly 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. Melcor Real Estate Investment 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:
Future Outlook: What are well-informed industry analysts predicting for MR.UN’s future growth? Take a look at our free research report of analyst consensus for MR.UN’s outlook.
Valuation: What is MR.UN 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 MR.UN 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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