Should You Invest In Paramount Group Inc (NYSE:PGRE)?
Paramount Group Inc is a US$3.7b mid-cap, real estate investment trust (REIT) based in New York, United States. 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. I’ll take you through some of the key metrics you should use in order to properly assess PGRE.
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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 PGRE’s daily operations. For PGRE, its FFO of US$190m makes up 41% of its gross profit, which means over a third of its earnings are high-quality and recurring.
In order to understand whether PGRE has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take PGRE to pay off its debt using its income from its main business activities, and gives us an insight into PGRE’s ability to service its borrowings. With a ratio of 5.3%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take PGRE 18.77 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 PGRE’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 1.34x, PGRE is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
I also use FFO to look at PGRE’s valuation relative to other REITs in United States 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 PGRE’s case its P/FFO is 19.47x, 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. Paramount Group 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 PGRE’s future growth? Take a look at our free research report of analyst consensus for PGRE’s outlook.
Valuation: What is PGRE 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 PGRE 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
