Investors Real Estate Trust is a US$711m small-cap, real estate investment trust (REIT) based in Minot, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how IRET’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess IRET.
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 IRET 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 IRET, its FFO of US$203m makes up 223% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether IRET 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 IRET to pay off its debt using its income from its main business activities, and gives us an insight into IRET’s ability to service its borrowings. With a ratio of 29%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take IRET 3.46 years to pay off using operating income alone, which is reasonable, given that long term debt is a multi-year commitment.
I also look at IRET’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 5.94x, it’s safe to say IRET is generating an appropriate amount of cash from its borrowings.
In terms of valuing IRET, 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. IRET’s price-to-FFO is 3.5x, compared to the long-term industry average of 16.5x, meaning that it is highly 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. Investors Real Estate 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:
- Future Outlook: What are well-informed industry analysts predicting for IRET’s future growth? Take a look at our free research report of analyst consensus for IRET’s outlook.
- Valuation: What is IRET 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 IRET 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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