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Independence Realty Trust, Inc. is a US$955m small-cap, real estate investment trust (REIT) based in Philadelphia, 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 IRT 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 IRT.
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 IRT’s daily operations. For IRT, its FFO of US$69m makes up 64% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether IRT 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 IRT to pay off its debt using its income from its main business activities, and gives us an insight into IRT’s ability to service its borrowings. With a ratio of 7.0%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take IRT 14.38 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.
Next, interest coverage ratio shows how many times IRT’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 1.9x, IRT is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
In terms of valuing IRT, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In IRT’s case its P/FFO is 13.87x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.
As a REIT, Independence Realty Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in IRT, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for IRT’s future growth? Take a look at our free research report of analyst consensus for IRT’s outlook.
Valuation: What is IRT 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 IRT 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.
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 email@example.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.