Is Big Yellow Group Plc (LON:BYG) A Healthy REIT?

Big Yellow Group Plc is a UK£1.6b mid-cap, real estate investment trust (REIT) based in Bagshot, United Kingdom. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. Below, I’ll look at a few important metrics to keep in mind as part of your research on BYG.

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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 BYG 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 BYG, its FFO of UK£63m makes up 73% of its gross profit, which means the majority of its earnings are high-quality and recurring.

LSE:BYG Historical Debt, April 2nd 2019
LSE:BYG Historical Debt, April 2nd 2019

In order to understand whether BYG 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 BYG to pay off its debt using its income from its main business activities, and gives us an insight into BYG’s ability to service its borrowings. With a ratio of 18%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take BYG 5.59 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 BYG’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 6.88x, it’s safe to say BYG is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at BYG’s valuation relative to other REITs in United Kingdom 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. BYG’s price-to-FFO is 26.17x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

As a REIT, Big Yellow Group offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in BYG, 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 BYG’s future growth? Take a look at our free research report of analyst consensus for BYG’s outlook.
  2. Valuation: What is BYG 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 BYG 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.

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