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Standard Life Investments Property Income Trust Limited is a UK£379m small-cap, real estate investment trust (REIT) based in Saint Peter Port, Channel Islands. 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 SLI.
Funds from Operations (FFO) is a higher quality measure of SLI’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For SLI, its FFO of UK£5.9m makes up 25% of its gross profit, which is relatively low, given most REITs’ earnings are predominantly high-quality and recurring funds from operations.
In order to understand whether SLI 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 SLI to pay off its debt using its income from its main business activities, and gives us an insight into SLI’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 SLI 18.99 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 SLI’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 1.75x, SLI 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 SLI’s valuation relative to other REITs in Channel Islands 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 SLI’s case its P/FFO is 64.57x, compared to the long-term industry average of 16.5x, meaning that it is highly overvalued.
As a REIT, Standard Life Investments Property Income Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in SLI, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for SLI’s future growth? Take a look at our free research report of analyst consensus for SLI’s outlook.
- Valuation: What is SLI 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 SLI 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 email@example.com.