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True North Commercial Real Estate Investment Trust is a CA$392m small-cap, real estate investment trust (REIT) based in Toronto, Canada. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how TNT.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 TNT.UN.
Funds from Operations (FFO) is a higher quality measure of TNT.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 TNT.UN, its FFO of CA$30m makes up 88% of its gross profit, which means the majority of its earnings are high-quality and recurring.
TNT.UN’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky TNT.UN is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 7.3%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take TNT.UN 13.65 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 TNT.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 2.81x, TNT.UN is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
In terms of valuing TNT.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 TNT.UN’s case its P/FFO is 12.89x, 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. True North 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:
- Future Outlook: What are well-informed industry analysts predicting for TNT.UN’s future growth? Take a look at our free research report of analyst consensus for TNT.UN’s outlook.
- Valuation: What is TNT.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 TNT.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.
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 firstname.lastname@example.org.