NorthWest Healthcare Properties Real Estate Investment Trust is a CA$1.7b small-cap, real estate investment trust (REIT) based in Toronto, Canada. 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 NWH.UN.
Funds from Operations (FFO) is a higher quality measure of NWH.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 NWH.UN, its FFO of CA$93m makes up 33% of its gross profit, which means over a third of its earnings are high-quality and recurring.
In order to understand whether NWH.UN 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 NWH.UN to pay off its debt using its income from its main business activities, and gives us an insight into NWH.UN’s ability to service its borrowings. With a ratio of 3.1%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take NWH.UN 32 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 NWH.UN’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 0.67x, NWH.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 NWH.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. NWH.UN's price-to-FFO is 18.81x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.
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. NorthWest Healthcare Properties Real Estate Investment 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 NWH.UN’s future growth? Take a look at our free research report of analyst consensus for NWH.UN’s outlook.
- Valuation: What is NWH.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 NWH.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.
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