Reven Housing REIT, Inc. is a US$47m small-cap, real estate investment trust (REIT) based in La Jolla, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how RVEN’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 RVEN.
Funds from Operations (FFO) is a higher quality measure of RVEN's earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For RVEN, its FFO of US$534k makes up 11% of its gross profit, which is relatively low, given most REITs' earnings are predominantly high-quality and recurring funds from operations.
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 RVEN 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 1.1%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take RVEN over 50 years to pay off using just operating income, which is extremely long. 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 RVEN’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 0.27x, RVEN 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 RVEN, 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 RVEN’s case its P/FFO is 88.68x, compared to the long-term industry average of 16.5x, meaning that it is highly overvalued.
As a REIT, Reven Housing REIT offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in RVEN, I highly recommend taking a look at other aspects of the stock to consider:
- Management: Who are the people running the company? Experienced management and board are important for setting the right strategy during a volatile market. Take a look at information on RVEN's executive and directors here.
- 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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