Investing In Property Through Artis Real Estate Investment Trust (TSE:AX.UN)

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Artis Real Estate Investment Trust is a CA$1.6b small-cap, real estate investment trust (REIT) based in Winnipeg, 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 AX.UN.

See our latest analysis for Artis 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 AX.UN’s daily operations. For AX.UN, its FFO of CA$214m makes up 69% of its gross profit, which means the majority of its earnings are high-quality and recurring.

Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for AX.UN to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 7.5%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take AX.UN 13 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 AX.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 2.12x, AX.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 AX.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 AX.UN’s case its P/FFO is 7.7x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.

Next Steps:

Artis Real Estate Investment Trust can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I've only covered one metric in this article, the FFO, which is by no means comprehensive. I'd strongly recommend continuing your research on the following areas I believe are key fundamentals for AX.UN:

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

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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.