How Should You Analyze REIT Stock Workspace Group plc (LON:WKP)?

Simply Wall St

Workspace Group plc is a UK£1.8b mid-cap, real estate investment trust (REIT) based in London, United Kingdom. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how WKP’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 WKP.

Check out our latest analysis for Workspace Group

Funds from Operations (FFO) is a higher quality measure of WKP'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 WKP, its FFO of UK£74m makes up 78% of its gross profit, which means the majority of its earnings are high-quality and recurring.

LSE:WKP Historical Debt, April 11th 2019

WKP'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 WKP 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 13%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take WKP 7.42 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 WKP'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 3.95x, it’s safe to say WKP is generating an appropriate amount of cash from its borrowings.

In terms of valuing WKP, 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. In WKP’s case its P/FFO is 23.84x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.