You May Have Been Looking At Select Income REIT (NASDAQ:SIR) All Wrong

Select Income REIT is a US$1.92B small-cap real estate investment trust (REIT) based in Newton, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how SIR’s business operates and also how we should analyse its stock. Below, I’ll look at a few important metrics to keep in mind as part of your research on SIR.

See our latest analysis for Select Income REIT

REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of SIR’s daily operations. For SIR, its FFO of US$222.89M makes up 52.70% of its gross profit, which means over a third of its earnings are high-quality and recurring.

NasdaqGS:SIR Historical Debt May 31st 18
NasdaqGS:SIR Historical Debt May 31st 18

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 SIR 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 7.06%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take SIR 14 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 SIR’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 2.4x, SIR is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

I also use FFO to look at SIR’s valuation relative to other REITs in United States 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 SIR’s case its P/FFO is 8.69x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.

Next Steps:

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