How To Look At Property For Industry Limited (NZSE:PFI)

Property For Industry Limited is a NZ$868m small-cap, real estate investment trust (REIT) based in Auckland, New Zealand. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how PFI’s business operates and also how we should analyse its stock. In this commentary, I’ll take you through some of the things I look at when assessing PFI.

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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 PFI 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 PFI, its FFO of NZ$2.0m makes up 2.8% of its gross profit, which is relatively low, given most REITs’ earnings are predominantly high-quality and recurring funds from operations.

NZSE:PFI Historical Debt December 6th 18
NZSE:PFI Historical Debt December 6th 18

In order to understand whether PFI 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 PFI to pay off its debt using its income from its main business activities, and gives us an insight into PFI’s ability to service its borrowings. With a ratio of less than 1%, the credit rating agency Standard & Poor would consider this significantly high risk, and PFI may need to sell off assets or take out more loans to keep afloat. At the level of debt, it would take over 50 years to pay off using just operating income, which is extremely long. 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 PFI’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 0.11x, PFI is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

In terms of valuing PFI, 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. PFI’s price-to-FFO is over 100x, well-above the long term industry average valuation of 16.5x. Needless to say PFI is highly overvalued.

Next Steps:

Property For Industry 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 PFI:

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