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Goodman Property Trust is a NZ$1.94b small-cap, real estate investment trust (REIT) based in Auckland, New Zealand. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how GMT’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 GMT.
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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 GMT 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 GMT, its FFO of NZ$89.7m makes up 55.7% of its gross profit, which means the majority of its earnings are high-quality and recurring.
GMT’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky GMT is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 10.6%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take GMT 9.39 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 GMT’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 3.46x, it’s safe to say GMT is generating an appropriate amount of cash from its borrowings.
In terms of valuing GMT, 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 GMT’s case its P/FFO is 21.52x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Next Steps:
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. Goodman Property Trust 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: