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Charter Hall Group is a AU$4.6b 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 CHC’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 CHC.
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of CHC’s daily operations. For CHC, its FFO of AU$169m makes up 54% of its gross profit, which means over a third of its earnings are high-quality and recurring.
In order to understand whether CHC 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 CHC to pay off its debt using its income from its main business activities, and gives us an insight into CHC’s ability to service its borrowings. With a ratio of over 500%, CHC's debt is more than well-covered, and the credit rating agency Standard & Poor would consider this as extremely minimal risk. This level of debt would take CHC around a month's worth of operating income alone to pay off, which is extremely fast since debt is usually a multi-year commitment.
I also look at CHC'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 52.84x, its safe to say CHC is producing more than enough funds to cover its upcoming payments.
I also use FFO to look at CHC'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. CHC's price-to-FFO is 27.99x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Charter Hall Group can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:
- Future Outlook: What are well-informed industry analysts predicting for CHC’s future growth? Take a look at our free research report of analyst consensus for CHC’s outlook.
- Valuation: What is CHC 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 CHC 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.
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 firstname.lastname@example.org. 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.