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One Metric To Rule Them All: EastGroup Properties Inc (NYSE:EGP)

Vernon Smith

EastGroup Properties Inc is a US$3.46b mid-cap, real estate investment trust (REIT) based in Ridgeland, 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 EGP is unique and it has to adhere to different requirements compared to other non-REIT stocks. In this commentary, I’ll take you through some of the things I look at when assessing EGP.

Check out our latest analysis for EastGroup Properties

Funds from Operations (FFO) is a higher quality measure of EGP’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 EGP, its FFO of US$155.0m makes up 79.9% of its gross profit, which means the majority of its earnings are high-quality and recurring.

NYSE:EGP Historical Debt September 25th 18

In order to understand whether EGP 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 EGP to pay off its debt using its income from its main business activities, and gives us an insight into EGP’s ability to service its borrowings. With a ratio of 13.7%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take EGP 7.29 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 EGP’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 4.46x, it’s safe to say EGP is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at EGP’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 EGP’s case its P/FFO is 21.78x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

EastGroup Properties 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 EGP:

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

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.