Crown Castle International Corp (REIT) is a US$46.1b large-cap, real estate investment trust (REIT) based in Houston, 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 CCI is unique and it has to adhere to different requirements compared to other non-REIT stocks. In this commentary, I’ll take you through some of the things I look at when assessing CCI.
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 CCI 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 CCI, its FFO of US$2.0b makes up 73% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether CCI 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 CCI to pay off its debt using its income from its main business activities, and gives us an insight into CCI’s ability to service its borrowings. With a ratio of 13%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take CCI 7.91 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 CCI’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 3.46x, it’s safe to say CCI is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at CCI’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. CCI’s price-to-FFO is 22.06x, compared to the long-term industry average of 16.5x, meaning that it is 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. Crown Castle International (REIT) 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 CCI’s future growth? Take a look at our free research report of analyst consensus for CCI’s outlook.
- Valuation: What is CCI 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 CCI 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.