Centuria Metropolitan REIT is a AU$753m small-cap, real estate investment trust (REIT) based in North Sydney, Australia. 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 CMA is unique and it has to adhere to different requirements compared to other non-REIT stocks. Below, I’ll look at a few important metrics to keep in mind as part of your research on CMA.
Funds from Operations (FFO) is a higher quality measure of CMA’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 CMA, its FFO of AU$49m makes up 90% of its gross profit, which means the majority of its earnings are high-quality and recurring.
CMA’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky CMA is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 18%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take CMA 5.42 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
I also look at CMA’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 5.09x, it’s safe to say CMA is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at CMA’s valuation relative to other REITs in Australia 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. CMA’s price-to-FFO is 15.25x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.
As a REIT, Centuria Metropolitan REIT offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in CMA, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for CMA’s future growth? Take a look at our free research report of analyst consensus for CMA’s outlook.
- Valuation: What is CMA 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 CMA 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.
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