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Should You Invest In Deutsche Konsum REIT-AG (ETR:DKG)?

Simply Wall St

Deutsche Konsum REIT-AG is a €428m small-cap, real estate investment trust (REIT) based in Potsdam, Germany. 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 DKG 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 DKG.

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View our latest analysis for Deutsche Konsum REIT-AG

Funds from Operations (FFO) is a higher quality measure of DKG'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 DKG, its FFO of €15m makes up 65% of its gross profit, which means the majority of its earnings are high-quality and recurring.

XTRA:DKG Historical Debt, May 17th 2019

In order to understand whether DKG 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 DKG to pay off its debt using its income from its main business activities, and gives us an insight into DKG’s ability to service its borrowings. With a ratio of 6.1%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take DKG 16.5 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 DKG’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 2.62x, DKG 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 DKG's valuation relative to other REITs in Germany 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. DKG's price-to-FFO is 29.51x, compared to the long-term industry average of 16.5x, meaning that it is 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. Deutsche Konsum REIT-AG 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 DKG’s future growth? Take a look at our free research report of analyst consensus for DKG’s outlook.
  2. Valuation: What is DKG 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 DKG 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.