How Should You Analyze REIT Stock Columbia Property Trust Inc (NYSE:CXP)?
Columbia Property Trust Inc is a US$2.5b mid-cap, real estate investment trust (REIT) based in Atlanta, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. I’ll take you through some of the key metrics you should use in order to properly assess CXP.
See our latest analysis for Columbia Property Trust
Funds from Operations (FFO) is a higher quality measure of CXP’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 CXP, its FFO of US$62m makes up 31% of its gross profit, which means over a third of its earnings are high-quality and recurring.
In order to understand whether CXP 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 CXP to pay off its debt using its income from its main business activities, and gives us an insight into CXP’s ability to service its borrowings. With a ratio of 3.5%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take CXP 28.83 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 CXP’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 1.02x, CXP 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 CXP’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 CXP’s case its P/FFO is 40.6x, compared to the long-term industry average of 16.5x, meaning that it is highly overvalued.
Next Steps:
Columbia Property Trust 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 CXP:
Future Outlook: What are well-informed industry analysts predicting for CXP’s future growth? Take a look at our free research report of analyst consensus for CXP’s outlook.
Valuation: What is CXP 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 CXP 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.
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.
