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OUE Commercial Real Estate Investment Trust is a S$1.5b small-cap, real estate investment trust (REIT) based in Singapore, Singapore. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how TS0U’s business operates and also how we should analyse its stock. Below, I'll look at a few important metrics to keep in mind as part of your research on TS0U.
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 TS0U’s daily operations. For TS0U, its FFO of S$133m makes up 104% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether TS0U 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 TS0U to pay off its debt using its income from its main business activities, and gives us an insight into TS0U’s ability to service its borrowings. With a ratio of 7.7%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take TS0U 13 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 TS0U’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 2.72x, TS0U 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 TS0U, 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 TS0U’s case its P/FFO is 11.34x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
OUE Commercial Real Estate Investment Trust can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I've only covered one metric in this article, the FFO, which is by no means comprehensive. I'd strongly recommend continuing your research on the following areas I believe are key fundamentals for TS0U:
- Future Outlook: What are well-informed industry analysts predicting for TS0U’s future growth? Take a look at our free research report of analyst consensus for TS0U’s outlook.
- Valuation: What is TS0U 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 TS0U 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.