GCP Student Living Plc is a UK£627m small-cap, real estate investment trust (REIT) based in Exeter, United Kingdom. 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 DIGS is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess DIGS.
Funds from Operations (FFO) is a higher quality measure of DIGS’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 DIGS, its FFO of UK£22m makes up 98% of its gross profit, which means the majority of its earnings are high-quality and recurring.
DIGS’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 DIGS 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 9.5%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take DIGS 10.5 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 DIGS’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 3.07x, it’s safe to say DIGS is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at DIGS’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. In DIGS’s case its P/FFO is 28.12x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
As a REIT, GCP Student Living offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in DIGS, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for DIGS’s future growth? Take a look at our free research report of analyst consensus for DIGS’s outlook.
- Valuation: What is DIGS 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 DIGS is currently mispriced by the market.
- 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 email@example.com.