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National Storage REIT is a AU$1.3b small-cap, real estate investment trust (REIT) based in Brisbane, Australia. 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 NSR is unique and it has to adhere to different requirements compared to other non-REIT stocks. Below, I’ll look at a few important metrics to keep in mind as part of your research on NSR.
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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 NSR 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 NSR, its FFO of AU$77m makes up 63% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether NSR 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 NSR to pay off its debt using its income from its main business activities, and gives us an insight into NSR’s ability to service its borrowings. With a ratio of 10%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take NSR 9.9 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 NSR’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 2.66x, NSR 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 NSR, 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. NSR’s price-to-FFO is 16.28x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.