U.S. Markets closed

How Should You Analyze REIT Stock Urban Logistics REIT plc (LON:SHED)?

Simply Wall St

Urban Logistics REIT plc is a UK£103m 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 SHED’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 SHED.

Check out our latest analysis for Urban Logistics REIT

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 SHED’s daily operations. For SHED, its FFO of UK£5.5m makes up 109% of its gross profit, which means the majority of its earnings are high-quality and recurring.

AIM:SHED Historical Debt, April 11th 2019

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 SHED 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 11%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take SHED 8.73 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 SHED’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 6.87x, it’s safe to say SHED is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at SHED's valuation relative to other REITs in United Kingdom 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 SHED’s case its P/FFO is 18.95x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.

Next Steps:

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. Urban Logistics REIT 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:

  1. Future Outlook: What are well-informed industry analysts predicting for SHED’s future growth? Take a look at our free research report of analyst consensus for SHED’s outlook.
  2. Valuation: What is SHED 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 SHED is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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.