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How Should You Analyze REIT Stock InnSuites Hospitality Trust (NYSEMKT:IHT)?

Simply Wall St

InnSuites Hospitality Trust is a US$21m small-cap, real estate investment trust (REIT) based in Phoenix, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how IHT’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 IHT.

See our latest analysis for InnSuites Hospitality Trust

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 IHT 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 IHT, its FFO of US$11m makes up 405% of its gross profit, which means the majority of its earnings are high-quality and recurring.

AMEX:IHT Historical Debt, September 16th 2019

In order to understand whether IHT 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 IHT to pay off its debt using its income from its main business activities, and gives us an insight into IHT’s ability to service its borrowings. With a ratio of 167%, the credit rating agency Standard & Poor would consider this as minimal risk. This would take IHT 7.18 months to pay off using operating income alone, which is fast since debt is usually a multi-year commitment.

Next, interest coverage ratio shows how many times IHT’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 29.85x, its safe to say IHT is producing more than enough funds to cover its upcoming payments.

In terms of valuing IHT, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. IHT's price-to-FFO is 1.8x, compared to the long-term industry average of 16.5x, meaning that it is highly undervalued

Next Steps:

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. InnSuites Hospitality Trust 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:

  1. Valuation: What is IHT 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 IHT is currently mispriced by the market.
  2. Management: Who are the people running the company? Experienced management and board are important for setting the right strategy during a volatile market. Take a look at information on IHT's executive and directors here.
  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.