Gladstone Land Corporation is a US$210m small-cap, real estate investment trust (REIT) based in McLean, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how LAND’s business operates and also how we should analyse its stock. Below, I’ll look at a few important metrics to keep in mind as part of your research on LAND.
Funds from Operations (FFO) is a higher quality measure of LAND’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 LAND, its FFO of US$7m makes up 30% of its gross profit, which is relatively low, given most REITs’ earnings are predominantly high-quality and recurring funds from operations.
LAND’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 LAND 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 2.0%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take LAND over 50 years to pay off using just operating income, which is extremely long. 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 LAND’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 0.56x, LAND 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 LAND’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 LAND’s case its P/FFO is 32.44x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
As a REIT, Gladstone Land offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in LAND, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for LAND’s future growth? Take a look at our free research report of analyst consensus for LAND’s outlook.
- Valuation: What is LAND 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 LAND 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.
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