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Should You Invest In Cominar Real Estate Investment Trust (TSE:CUF.UN)?

Simply Wall St

Cominar Real Estate Investment Trust is a CA$2.1b small-cap, real estate investment trust (REIT) based in Quebec City, 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 CUF.UN is unique and it has to adhere to different requirements compared to other non-REIT stocks. In this commentary, I'll take you through some of the things I look at when assessing CUF.UN.

Check out our latest analysis for Cominar Real Estate Investment Trust

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 CUF.UN 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 CUF.UN, its FFO of CA$183m makes up 48% of its gross profit, which means over a third of its earnings are high-quality and recurring.

TSX:CUF.UN Historical Debt, April 18th 2019

In order to understand whether CUF.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 CUF.UN to pay off its debt using its income from its main business activities, and gives us an insight into CUF.UN’s ability to service its borrowings. With a ratio of 5.1%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take CUF.UN 19.78 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.

I also look at CUF.UN'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 1.19x, CUF.UN 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 CUF.UN, 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 CUF.UN’s case its P/FFO is 11.56x, compared to the long-term industry average of 16.5x, meaning that it is 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. Cominar 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:

  1. Future Outlook: What are well-informed industry analysts predicting for CUF.UN’s future growth? Take a look at our free research report of analyst consensus for CUF.UN’s outlook.
  2. Valuation: What is CUF.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 CUF.UN is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.