Getty Realty Corp. is a US$1.3b small-cap, real estate investment trust (REIT) based in Jericho, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how GTY’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 GTY.
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 GTY’s daily operations. For GTY, its FFO of US$63m makes up 56% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether GTY 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 GTY to pay off its debt using its income from its main business activities, and gives us an insight into GTY’s ability to service its borrowings. With a ratio of 14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take GTY 6.97 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.
I also look at GTY’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 2.83x, GTY 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 GTY’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. GTY’s price-to-FFO is 20.88x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Getty Realty 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 GTY:
- Future Outlook: What are well-informed industry analysts predicting for GTY’s future growth? Take a look at our free research report of analyst consensus for GTY’s outlook.
- Valuation: What is GTY 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 GTY 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.
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