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How Should You Analyze REIT Stock Hudson Pacific Properties, Inc. (NYSE:HPP)?

Simply Wall St

Hudson Pacific Properties, Inc. is a US$5.4b mid-cap, real estate investment trust (REIT) based in Los Angeles, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how HPP’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 HPP.

View our latest analysis for Hudson Pacific Properties

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 HPP’s daily operations. For HPP, its FFO of US$215m makes up 47% of its gross profit, which means over a third of its earnings are high-quality and recurring.

NYSE:HPP Historical Debt, April 17th 2019

In order to understand whether HPP 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 HPP to pay off its debt using its income from its main business activities, and gives us an insight into HPP’s ability to service its borrowings. With a ratio of 7.6%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take HPP 13.18 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.

I also look at HPP'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 2.58x, HPP 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 HPP'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. HPP's price-to-FFO is 24.56x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

As a REIT, Hudson Pacific Properties offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in HPP, I highly recommend taking a look at other aspects of the stock to consider:

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