Montea Comm VA is a €671m small-cap, real estate investment trust (REIT) based in Erembodegem, Belgium. 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. I’ll take you through some of the key metrics you should use in order to properly assess MONT.
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of MONT’s daily operations. For MONT, its FFO of €67m makes up 157% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether MONT 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 MONT to pay off its debt using its income from its main business activities, and gives us an insight into MONT’s ability to service its borrowings. With a ratio of 17%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take MONT 5.79 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
Next, interest coverage ratio shows how many times MONT’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 5.97x, it’s safe to say MONT is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at MONT’s valuation relative to other REITs in Belgium 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 MONT’s case its P/FFO is 10.11x, compared to the long-term industry average of 16.5x, meaning that it is 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. Montea Comm. VA 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:
- Valuation: What is MONT 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 MONT is currently mispriced by the market.
- Management: Who are the people running the company? Experienced management and board are important for setting the right strategy during a volatile market. Take a look at information on MONT’s executive and directors here.
- 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.