Charter Hall Group is a AU$3.2b mid-cap, real estate investment trust (REIT) based in Sydney, Australia. 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 CHC 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 CHC.
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 CHC 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 CHC, its FFO of AU$169m makes up 54% of its gross profit, which means over a third of its earnings are high-quality and recurring.
Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for CHC to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of over 500%, CHC’s debt is more than well-covered, and the credit rating agency Standard & Poor would consider this as extremely minimal risk. This level of debt would take CHC around a month’s worth of operating income alone to pay off, which is extremely fast since debt is usually a multi-year commitment.
Next, interest coverage ratio shows how many times CHC’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 52.84x, its safe to say CHC is producing more than enough funds to cover its upcoming payments.
I also use FFO to look at CHC’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. CHC’s price-to-FFO is 18.95x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.
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. Charter Hall Group 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:
- Future Outlook: What are well-informed industry analysts predicting for CHC’s future growth? Take a look at our free research report of analyst consensus for CHC’s outlook.
- Valuation: What is CHC 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 CHC 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 email@example.com.