Minto Apartment Real Estate Investment Trust is a CA$994m small-cap, real estate investment trust (REIT) based in Ottawa, Canada. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how MI.UN’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 MI.UN.
Funds from Operations (FFO) is a higher quality measure of MI.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 MI.UN, its FFO of CA$31m makes up 67% 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 MI.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 7.0%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take MI.UN 14.23 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 MI.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 1.81x, MI.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 MI.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 MI.UN’s case its P/FFO is 32.36x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
As a REIT, Minto Apartment Real Estate Investment Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in MI.UN, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for MI.UN’s future growth? Take a look at our free research report of analyst consensus for MI.UN’s outlook.
- Valuation: What is MI.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 MI.UN is currently mispriced by the market.
- 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.
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