Why You Shouldn’t Look At Stockland’s (ASX:SGP) Bottom Line

Stockland is a AU$8.8b 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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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 SGP 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 SGP, its FFO of AU$728m makes up 85% of its gross profit, which means the majority of its earnings are high-quality and recurring.

ASX:SGP Historical Debt January 23rd 19
ASX:SGP Historical Debt January 23rd 19

Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for SGP to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 18%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take SGP 5.55 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 9.45x, it’s safe to say SGP is generating an appropriate amount of cash from its borrowings.

In terms of valuing SGP, 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. SGP’s price-to-FFO is 12.18x, 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 editorial-team@simplywallst.com.