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Hersha Hospitality Trust is a US$777m small-cap, real estate investment trust (REIT) based in Harrisburg, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of HT is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess HT.
Funds from Operations (FFO) is a higher quality measure of HT’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 HT, its FFO of US$115m makes up 73% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether HT 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 HT to pay off its debt using its income from its main business activities, and gives us an insight into HT’s ability to service its borrowings. With a ratio of 10%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take HT 9.52 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 HT’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 2.37x, HT 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 HT’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 HT’s case its P/FFO is 6.76x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
As a REIT, Hersha Hospitality Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in HT, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for HT’s future growth? Take a look at our free research report of analyst consensus for HT’s outlook.
Valuation: What is HT 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 HT 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.
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