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Liberty Property Trust is a US$7.3b mid-cap, real estate investment trust (REIT) based in Wayne, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of LPT is unique and it has to adhere to different requirements compared to other non-REIT stocks. Below, I'll look at a few important metrics to keep in mind as part of your research on LPT.
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 LPT’s daily operations. For LPT, its FFO of US$378m makes up 91% of its gross profit, which means the majority of its earnings are high-quality and recurring.
LPT'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 LPT 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 12%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take LPT 8.19 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 LPT’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 4.22x, it’s safe to say LPT is generating an appropriate amount of cash from its borrowings.
In terms of valuing LPT, 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. In LPT’s case its P/FFO is 19.65x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.
As a REIT, Liberty Property Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in LPT, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for LPT’s future growth? Take a look at our free research report of analyst consensus for LPT’s outlook.
- Valuation: What is LPT 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 LPT 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.
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 email@example.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.