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Garda Diversified Property Fund is a AU$214m 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 GDF 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 GDF.
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Funds from Operations (FFO) is a higher quality measure of GDF's earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For GDF, its FFO of AU$11m makes up 78% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether GDF 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 GDF to pay off its debt using its income from its main business activities, and gives us an insight into GDF’s ability to service its borrowings. With a ratio of 11%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take GDF 9.49 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 GDF’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 6.8x, it’s safe to say GDF is generating an appropriate amount of cash from its borrowings.
In terms of valuing GDF, 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. GDF's price-to-FFO is 18.89x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.
Next Steps:
Garda Diversified Property Fund 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 GDF: