Is Seritage Growth Properties (NYSE:SRG) A Healthy REIT?

Seritage Growth Properties is a US$1.98B small-cap real estate investment trust (REIT) based in New York, United States. 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 SRG is unique and it has to adhere to different requirements compared to other non-REIT stocks. In this commentary, I’ll take you through some of the things I look at when assessing SRG.

Check out our latest analysis for Seritage Growth Properties

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 SRG’s daily operations. For SRG, its FFO of US$69.65M makes up 41.49% of its gross profit, which means over a third of its earnings are high-quality and recurring.

NYSE:SRG Historical Debt Mar 19th 18
NYSE:SRG Historical Debt Mar 19th 18

SRG’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 SRG 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 5.18%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take SRG 19 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 SRG’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 0.99x, SRG 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 SRG’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. SRG’s price-to-FFO is 28.48x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

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