Uniti Group Inc. is a US$1.4b small-cap, real estate investment trust (REIT) based in Little Rock, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how UNIT’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 UNIT.
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of UNIT’s daily operations. For UNIT, its FFO of US$473m makes up 54% of its gross profit, which means over a third of its earnings are high-quality and recurring.
In order to understand whether UNIT 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 UNIT to pay off its debt using its income from its main business activities, and gives us an insight into UNIT’s ability to service its borrowings. With a ratio of 9.6%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take UNIT 10 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 UNIT’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 1.48x, UNIT 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 UNIT's valuation relative to other REITs in United States 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 UNIT’s case its P/FFO is 3.05x, compared to the long-term industry average of 16.5x, meaning that it is highly 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. Uniti Group 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 UNIT’s future growth? Take a look at our free research report of analyst consensus for UNIT’s outlook.
- Valuation: What is UNIT 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 UNIT 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.
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