Why You Shouldn't Look At Ground Rents Income Fund PLC's (LON:GRIO) Bottom Line
Ground Rents Income Fund PLC is a UK£77m small-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 GRIO’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 GRIO.
Check out our latest analysis for Ground Rents Income Fund
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 GRIO’s daily operations. For GRIO, its FFO of UK£4.0m makes up 81% of its gross profit, which means the majority of its earnings are high-quality and recurring.
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 GRIO 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 21%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take GRIO 4.76 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.
Next, interest coverage ratio shows how many times GRIO’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 5.35x, it’s safe to say GRIO is generating an appropriate amount of cash from its borrowings.
In terms of valuing GRIO, 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 GRIO’s case its P/FFO is 19.18x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.
Next Steps:
As a REIT, Ground Rents Income Fund offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in GRIO, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for GRIO’s future growth? Take a look at our free research report of analyst consensus for GRIO’s outlook.
Valuation: What is GRIO 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 GRIO 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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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.
