How Should You Analyze REIT Stock H&R Real Estate Investment Trust (TSE:HR.UN)?

H&R Real Estate Investment Trust is a CA$6.5b mid-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. Below, I'll look at a few important metrics to keep in mind as part of your research on HR.UN.

Check out our latest analysis for H&R Real Estate Investment Trust

Funds from Operations (FFO) is a higher quality measure of HR.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 HR.UN, its FFO of CA$462m makes up 72% of its gross profit, which means the majority of its earnings are high-quality and recurring.

In order to understand whether HR.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 HR.UN to pay off its debt using its income from its main business activities, and gives us an insight into HR.UN’s ability to service its borrowings. With a ratio of 6.7%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take HR.UN 14.88 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.

Next, interest coverage ratio shows how many times HR.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 1.75x, HR.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 HR.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 HR.UN’s case its P/FFO is 14.03x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.

Next Steps:

H&R 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 HR.UN:

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