Investing In Property Through Uniti Group Inc. (NASDAQ:UNIT)

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Uniti Group Inc. is a US$1.8b small-cap, real estate investment trust (REIT) based in Little Rock, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how UNIT’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 UNIT.

View our latest analysis for Uniti Group

Funds from Operations (FFO) is a higher quality measure of UNIT’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 UNIT, its FFO of US$473m makes up 54% of its gross profit, which means over a third of its earnings are high-quality and recurring.

NasdaqGS:UNIT Historical Debt, July 5th 2019
NasdaqGS:UNIT Historical Debt, July 5th 2019

In order to understand whether UNIT 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 UNIT to pay off its debt using its income from its main business activities, and gives us an insight into UNIT’s ability to service its borrowings. With a ratio of 9.6%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take UNIT 10 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 UNIT’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 1.48x, UNIT 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 UNIT, 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. UNIT’s price-to-FFO is 3.9x, compared to the long-term industry average of 16.5x, meaning that it is highly undervalued

Next Steps:

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. Uniti Group 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:

  1. Future Outlook: What are well-informed industry analysts predicting for UNIT’s future growth? Take a look at our free research report of analyst consensus for UNIT’s outlook.
  2. Valuation: What is UNIT 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 UNIT 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.