Dream Industrial Real Estate Investment Trust is a CA$1.5b 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 DIR.UN’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess DIR.UN.
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 DIR.UN’s daily operations. For DIR.UN, its FFO of CA$78m makes up 58% of its gross profit, which means the majority of its earnings are high-quality and recurring.
Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for DIR.UN to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 8.3%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take DIR.UN 12.05 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 DIR.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 1.54x, DIR.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 DIR.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. DIR.UN’s price-to-FFO is 19.28x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.
Dream Industrial 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 DIR.UN:
- Future Outlook: What are well-informed industry analysts predicting for DIR.UN’s future growth? Take a look at our free research report of analyst consensus for DIR.UN’s outlook.
- Valuation: What is DIR.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 DIR.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.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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.