Yahoo Finance You May Have Been Looking At Goodman Property Trust (NZSE:GMT) All Wrong
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Goodman Property Trust is a NZ$2.2b small-cap, real estate investment trust (REIT) based in Auckland, New Zealand. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how GMT’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 GMT.
Check out our latest analysis for Goodman Property Trust
Funds from Operations (FFO) is a higher quality measure of GMT'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 GMT, its FFO of NZ$90m makes up 56% of its gross profit, which means the majority of its earnings are high-quality and recurring.
GMT'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 GMT 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 11%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take GMT 9.39 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 GMT’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 3.46x, it’s safe to say GMT is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at GMT's valuation relative to other REITs in New Zealand 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. In GMT’s case its P/FFO is 24.4x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Next Steps:
Goodman Property Trust 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 GMT:
Future Outlook: What are well-informed industry analysts predicting for GMT’s future growth? Take a look at our free research report of analyst consensus for GMT’s outlook.
Valuation: What is GMT 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 GMT 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.
