Franklin Street Properties Corp. is a US$820m small-cap, real estate investment trust (REIT) based in Wakefield, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how FSP’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 FSP.
A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT's main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much FSP actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For FSP, its FFO of US$80m makes up 50% of its gross profit, which means over a third 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 FSP 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 8.1%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take FSP 12.32 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 FSP'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 2.09x, FSP is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
In terms of valuing FSP, 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. FSP's price-to-FFO is 10.23x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Franklin Street Properties can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:
- Future Outlook: What are well-informed industry analysts predicting for FSP’s future growth? Take a look at our free research report of analyst consensus for FSP’s outlook.
- Valuation: What is FSP 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 FSP 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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