Green REIT plc is a €1.07b small-cap, real estate investment trust (REIT) based in Dublin, Ireland. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how GN1’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess GN1.
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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 GN1’s daily operations. For GN1, its FFO of €24.3m makes up 58.5% of its gross profit, which means the majority of its earnings are high-quality and recurring.
GN1’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 GN1 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 8.8%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take GN1 11.39 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.
Next, interest coverage ratio shows how many times GN1’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 6.93x, it’s safe to say GN1 is generating an appropriate amount of cash from its borrowings.
In terms of valuing GN1, 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 GN1’s case its P/FFO is 44.27x, compared to the long-term industry average of 16.5x, meaning that it is highly overvalued.
Next Steps:
Green REIT 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 GN1: