How Should You Analyze REIT Stock Stockland (ASX:SGP)?

Stockland is a AU$9.97b mid-cap, real estate investment trust (REIT) based in Sydney, 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 SGP 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 SGP.

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Funds from Operations (FFO) is a higher quality measure of SGP’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 SGP, its FFO of AU$921.00m makes up 117.03% of its gross profit, which means the majority of its earnings are high-quality and recurring.

ASX:SGP Historical Debt July 30th 18
ASX:SGP Historical Debt July 30th 18

In order to understand whether SGP 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 SGP to pay off its debt using its income from its main business activities, and gives us an insight into SGP’s ability to service its borrowings. With a ratio of 24.95%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take SGP 4.01 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.

Next, interest coverage ratio shows how many times SGP’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 11.1x, its safe to say SGP is producing more than enough funds to cover its upcoming payments.

I also use FFO to look at SGP’s valuation relative to other REITs in Australia by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. In SGP’s case its P/FFO is 10.92x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.

Next Steps:

As a REIT, Stockland offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in SGP, I highly recommend taking a look at other aspects of the stock to consider:

  1. Future Outlook: What are well-informed industry analysts predicting for SGP’s future growth? Take a look at our free research report of analyst consensus for SGP’s outlook.
  2. Valuation: What is SGP 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 SGP is currently mispriced by the market.
  3. 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at