Monmouth Real Estate Investment Corporation is a US$1.34b small-cap, real estate investment trust (REIT) based in Freehold, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of MNR is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess MNR.
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 MNR 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 MNR, its FFO of US$73.87m makes up 78.24% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether MNR 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 MNR to pay off its debt using its income from its main business activities, and gives us an insight into MNR’s ability to service its borrowings. With a ratio of 10.38%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take MNR 9.63 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 MNR’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 2.87x, MNR 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 MNR, 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. MNR’s price-to-FFO is 17.97x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.
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. Monmouth Real Estate Investment 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 MNR’s future growth? Take a look at our free research report of analyst consensus for MNR’s outlook.
- Valuation: What is MNR 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 MNR 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.