Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
SmartCentres Real Estate Investment Trust is a CA$5.7b mid-cap, real estate investment trust (REIT) based in Vaughan, 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 SRU.UN 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 SRU.UN.
Funds from Operations (FFO) is a higher quality measure of SRU.UN'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 SRU.UN, its FFO of CA$351m makes up 68% of its gross profit, which means the majority of its earnings are high-quality and recurring.
SRU.UN'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 SRU.UN 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 8.5%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take SRU.UN 12 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 SRU.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 2.49x, SRU.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 SRU.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 SRU.UN’s case its P/FFO is 16.19x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.
As a REIT, SmartCentres Real Estate Investment Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in SRU.UN, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for SRU.UN’s future growth? Take a look at our free research report of analyst consensus for SRU.UN’s outlook.
- Valuation: What is SRU.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 SRU.UN 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.
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 firstname.lastname@example.org. 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.