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Investing In Carindale Property Trust (ASX:CDP): What You Need To Know

Carindale Property Trust is a AU$543m small-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 CDP’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 CDP.

View our latest analysis for Carindale Property Trust

Funds from Operations (FFO) is a higher quality measure of CDP’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 CDP, its FFO of AU$28m makes up 77% of its gross profit, which means the majority of its earnings are high-quality and recurring.

ASX:CDP Historical Debt November 16th 18
ASX:CDP Historical Debt November 16th 18

In order to understand whether CDP 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 CDP to pay off its debt using its income from its main business activities, and gives us an insight into CDP’s ability to service its borrowings. With a ratio of 12%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take CDP 8.04 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 CDP’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 3.29x, it’s safe to say CDP is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at CDP’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. In CDP’s case its P/FFO is 19.21x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.

Next Steps:

As a REIT, Carindale Property Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in CDP, 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 CDP’s future growth? Take a look at our free research report of analyst consensus for CDP’s outlook.

  2. Valuation: What is CDP 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 CDP 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.

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.

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