Power REIT is a US$11m small-cap, real estate investment trust (REIT) based in Old Bethpage, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how PW’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 PW.
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 PW’s daily operations. For PW, its FFO of US$1.1m makes up 54% of its gross profit, which means over a third of its earnings are high-quality and recurring.
In order to understand whether PW 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 PW to pay off its debt using its income from its main business activities, and gives us an insight into PW’s ability to service its borrowings. With a ratio of 11%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take PW 9.39 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 PW’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 2.15x, PW is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
In terms of valuing PW, 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. PW’s price-to-FFO is 10.43x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
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. Power 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 PW’s future growth? Take a look at our free research report of analyst consensus for PW’s outlook.
- Valuation: What is PW 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 PW 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.