Global Self Storage, Inc. is a US$30m small-cap, real estate investment trust (REIT) based in New York, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how SELF’s business operates and also how we should analyse its stock. In this commentary, I’ll take you through some of the things I look at when assessing SELF.
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 SELF 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 SELF, its FFO of US$1.9m makes up 43% 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 SELF 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 9.6%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take SELF 10.38 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 SELF’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 2.12x, SELF 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 SELF, 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 SELF’s case its P/FFO is 16.17x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.
As a REIT, Global Self Storage offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in SELF, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for SELF’s future growth? Take a look at our free research report of analyst consensus for SELF’s outlook.
- Valuation: What is SELF 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 SELF 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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