Eurocommercial Properties N.V. is a €1.2b small-cap, real estate investment trust (REIT) based in Amsterdam, Netherlands. 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. In this commentary, I'll take you through some of the things I look at when assessing ECMPA.
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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 ECMPA 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 ECMPA, its FFO of €108m makes up 63% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether ECMPA 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 ECMPA to pay off its debt using its income from its main business activities, and gives us an insight into ECMPA’s ability to service its borrowings. With a ratio of 5.8%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take ECMPA 17.13 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 ECMPA'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 3.26x, it’s safe to say ECMPA is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at ECMPA's valuation relative to other REITs in Netherlands 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 ECMPA’s case its P/FFO is 11.49x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
Eurocommercial Properties can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I've only covered one metric in this article, the FFO, which is by no means comprehensive. I'd strongly recommend continuing your research on the following areas I believe are key fundamentals for ECMPA:
- Future Outlook: What are well-informed industry analysts predicting for ECMPA’s future growth? Take a look at our free research report of analyst consensus for ECMPA’s outlook.
- Valuation: What is ECMPA 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 ECMPA 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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