How Should You Analyze REIT Stock RioCan Real Estate Investment Trust (TSE:REI.UN)?

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RioCan Real Estate Investment Trust is a CA$8.1b mid-cap, real estate investment trust (REIT) based in Toronto, Canada. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how REI.UN’s business operates and also how we should analyse its stock. In this commentary, I’ll take you through some of the things I look at when assessing REI.UN.

See our latest analysis for RioCan Real Estate Investment Trust

Funds from Operations (FFO) is a higher quality measure of REI.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 REI.UN, its FFO of CA$403m makes up 54% of its gross profit, which means over a third of its earnings are high-quality and recurring.

TSX:REI.UN Historical Debt, July 10th 2019
TSX:REI.UN Historical Debt, July 10th 2019

REI.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 REI.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 6.8%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take REI.UN 15 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 REI.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 2.4x, REI.UN is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

I also use FFO to look at REI.UN’s valuation relative to other REITs in Canada 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 REI.UN’s case its P/FFO is 20.06x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

As a REIT, RioCan 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 REI.UN, I highly recommend taking a look at other aspects of the stock to consider:

  1. Future Outlook: What are well-informed industry analysts predicting for REI.UN’s future growth? Take a look at our free research report of analyst consensus for REI.UN’s outlook.
  2. Valuation: What is REI.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 REI.UN is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com. 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.