Agellan Commercial Real Estate Investment Trust is a CA$377.57M 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. I’ll take you through some of the key metrics you should use in order to properly assess ACR.UN.Check out our latest analysis for Agellan Commercial Real Estate Investment Trust
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 ACR.UN’s daily operations. For ACR.UN, its FFO of CA$59.06M makes up 97.95% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether ACR.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 ACR.UN to pay off its debt using its income from its main business activities, and gives us an insight into ACR.UN’s ability to service its borrowings. With a ratio of 15.06%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take ACR.UN 6.64 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 ACR.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 3.67x, it’s safe to say ACR.UN is generating an appropriate amount of cash from its borrowings.
In terms of valuing ACR.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 ACR.UN’s case its P/FFO is 6.39x, compared to the long-term industry average of 16.5x, meaning that it is 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. Agellan Commercial 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:
- Valuation: What is ACR.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 ACR.UN 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 ACR.UN’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.