Armada Hoffler Properties, Inc. is a US$1.1b small-cap, real estate investment trust (REIT) based in Virginia Beach, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how AHH’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess AHH.
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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 AHH 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 AHH, its FFO of US$56m makes up 69% of its gross profit, which means the majority of its earnings are high-quality and recurring.
AHH's financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky AHH is, broadly speaking, to have debt on its books. The metric I'll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 8.1%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take AHH 12.42 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 AHH'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 2.94x, AHH 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 AHH'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. AHH's price-to-FFO is 20.36x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Armada Hoffler Properties can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I've only covered one metric in this article, the FFO, which is by no means comprehensive. I'd strongly recommend continuing your research on the following areas I believe are key fundamentals for AHH:
- Future Outlook: What are well-informed industry analysts predicting for AHH’s future growth? Take a look at our free research report of analyst consensus for AHH’s outlook.
- Valuation: What is AHH 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 AHH 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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