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Mapletree North Asia Commercial Trust is a S$4.0b mid-cap, real estate investment trust (REIT) based in Singapore, Singapore. 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 RW0U is unique and it has to adhere to different requirements compared to other non-REIT stocks. In this commentary, I’ll take you through some of the things I look at when assessing RW0U.
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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 RW0U 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 RW0U, its FFO of S$306m makes up 113% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether RW0U 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 RW0U to pay off its debt using its income from its main business activities, and gives us an insight into RW0U’s ability to service its borrowings. With a ratio of 13%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take RW0U 7.71 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 RW0U’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 4.83x, it’s safe to say RW0U is generating an appropriate amount of cash from its borrowings.
In terms of valuing RW0U, 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. RW0U’s price-to-FFO is 12.92x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.