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One Metric To Rule Them All: Mirvac Group (ASX:MGR)

Simply Wall St

Mirvac Group is a AU$12b mid-cap, real estate investment trust (REIT) based in Sydney, Australia. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how MGR’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess MGR.

View our latest analysis for Mirvac Group

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 MGR 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 MGR, its FFO of AU$518m makes up 52% of its gross profit, which means over a third of its earnings are high-quality and recurring.

ASX:MGR Historical Debt, September 12th 2019

MGR'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 MGR 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 15%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take MGR 6.86 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.

I also look at MGR's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 4.11x, it’s safe to say MGR is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at MGR's valuation relative to other REITs in Australia 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. MGR's price-to-FFO is 23.09x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

Mirvac Group 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 MGR:

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