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One Metric To Rule Them All: Great Portland Estates Plc (LON:GPOR)

Simply Wall St

Great Portland Estates Plc is a UK£1.8b mid-cap, real estate investment trust (REIT) based in London, United Kingdom. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how GPOR’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 GPOR.

Check out our latest analysis for Great Portland Estates

Funds from Operations (FFO) is a higher quality measure of GPOR'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 GPOR, its FFO of UK£27m makes up 39% of its gross profit, which means over a third of its earnings are high-quality and recurring.

LSE:GPOR Historical Debt, September 16th 2019

GPOR'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 GPOR 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 8.0%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take GPOR 12 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 GPOR’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 3.33x, it’s safe to say GPOR is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at GPOR's valuation relative to other REITs in United Kingdom 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. GPOR's price-to-FFO is 68.18x, compared to the long-term industry average of 16.5x, meaning that it is highly overvalued.

Next Steps:

Great Portland Estates 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 GPOR:

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.