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Goodman Group is a AU$25b large-cap, real estate investment trust (REIT) based in Sydney, Australia. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. I’ll take you through some of the key metrics you should use in order to properly assess GMG.
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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 GMG’s daily operations. For GMG, its FFO of AU$828m makes up 40% of its gross profit, which means over a third of its earnings are high-quality and recurring.
In order to understand whether GMG 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 GMG to pay off its debt using its income from its main business activities, and gives us an insight into GMG’s ability to service its borrowings. With a ratio of 28%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take GMG 3.6 years to pay off using operating income alone, which is reasonable, given that long term debt is a multi-year commitment.
I also look at GMG'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 10.68x, its safe to say GMG is producing more than enough funds to cover its upcoming payments.
I also use FFO to look at GMG's valuation relative to other REITs in Australia 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. GMG's price-to-FFO is 29.94x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Next Steps:
Goodman Group 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 GMG: