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Investing In Choice Properties Real Estate Investment Trust (TSE:CHP.UN): What You Need To Know

Simply Wall St

Choice Properties Real Estate Investment Trust is a CA$9.7b mid-cap, real estate investment trust (REIT) based in Toronto, Canada. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how CHP.UN’s business operates and also how we should analyse its stock. Below, I'll look at a few important metrics to keep in mind as part of your research on CHP.UN.

See our latest analysis for Choice Properties Real Estate Investment Trust

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 CHP.UN’s daily operations. For CHP.UN, its FFO of CA$684m makes up 80% of its gross profit, which means the majority of its earnings are high-quality and recurring.

TSX:CHP.UN Historical Debt, September 11th 2019

In order to understand whether CHP.UN 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 CHP.UN to pay off its debt using its income from its main business activities, and gives us an insight into CHP.UN’s ability to service its borrowings. With a ratio of 5.9%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take CHP.UN 17 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 CHP.UN'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 1.32x, CHP.UN 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 CHP.UN's valuation relative to other REITs in Canada 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 CHP.UN’s case its P/FFO is 14.3x, compared to the long-term industry average of 16.5x, meaning that it is slightly 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. Choice Properties Real Estate Investment 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. Future Outlook: What are well-informed industry analysts predicting for CHP.UN’s future growth? Take a look at our free research report of analyst consensus for CHP.UN’s outlook.
  2. Valuation: What is CHP.UN 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 CHP.UN 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.