Should You Invest In UK Commercial Property REIT Limited (LON:UKCM)?

UK Commercial Property REIT Limited is a UK£1.1b small-cap, real estate investment trust (REIT) based in Edinburgh, United Kingdom. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how UKCM’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 UKCM.

See our latest analysis for UK Commercial Property REIT

A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT’s main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much UKCM actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For UKCM, its FFO of UK£42m makes up 75% of its gross profit, which means the majority of its earnings are high-quality and recurring.

LSE:UKCM Historical Debt January 1st 19
LSE:UKCM Historical Debt January 1st 19

UKCM’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 UKCM 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 17%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take UKCM 5.93 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 UKCM’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 5.42x, it’s safe to say UKCM is generating an appropriate amount of cash from its borrowings.

In terms of valuing UKCM, 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 UKCM’s case its P/FFO is 25.5x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

As a REIT, UK Commercial Property REIT offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in UKCM, I highly recommend taking a look at other aspects of the stock to consider:

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

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 editorial-team@simplywallst.com.