Columbia Property Trust, Inc. is a US$2.6b mid-cap, real estate investment trust (REIT) based in Atlanta, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how CXP’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 CXP.
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 CXP’s daily operations. For CXP, its FFO of US$98m makes up 47% of its gross profit, which means over a third of its earnings are high-quality and recurring.
CXP'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 CXP 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 7.4%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take CXP 14 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 CXP'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 1.73x, CXP 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 CXP, 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 CXP’s case its P/FFO is 26.24x, 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. Columbia Property 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:
- Future Outlook: What are well-informed industry analysts predicting for CXP’s future growth? Take a look at our free research report of analyst consensus for CXP’s outlook.
- Valuation: What is CXP 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 CXP 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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