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Is GDI Property Group (ASX:GDI) A Healthy REIT?

Simply Wall St

GDI Property Group is a AU$846m small-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. In this commentary, I'll take you through some of the things I look at when assessing GDI.

Check out our latest analysis for GDI Property Group

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 GDI’s daily operations. For GDI, its FFO of AU$51m makes up 87% of its gross profit, which means the majority of its earnings are high-quality and recurring.

ASX:GDI Historical Debt, August 31st 2019

GDI'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 GDI 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 74%, the credit rating agency Standard & Poor would consider this as minimal risk. This would take GDI around a year to pay off using operating income alone, which is reasonable, given that long term debt is a multi-year commitment.

I also look at GDI'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 16x, its safe to say GDI is producing more than enough funds to cover its upcoming payments.

I also use FFO to look at GDI'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. In GDI’s case its P/FFO is 16.51x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.

Next Steps:

GDI Property 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 GDI:

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