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Federal Realty Investment Trust is a US$10b large-cap, real estate investment trust (REIT) based in Rockville, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how FRT’s business operates and also how we should analyse its stock. In this commentary, I'll take you through some of the things I look at when assessing FRT.
Funds from Operations (FFO) is a higher quality measure of FRT'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 FRT, its FFO of US$517m makes up 82% of its gross profit, which means the majority of its earnings are high-quality and recurring.
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 FRT 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 16%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take FRT 6.25 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
Next, interest coverage ratio shows how many times FRT’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 4.69x, it’s safe to say FRT is generating an appropriate amount of cash from its borrowings.
In terms of valuing FRT, 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 FRT’s case its P/FFO is 20.01x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Federal Realty Investment Trust 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 FRT:
- Future Outlook: What are well-informed industry analysts predicting for FRT’s future growth? Take a look at our free research report of analyst consensus for FRT’s outlook.
- Valuation: What is FRT 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 FRT 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 firstname.lastname@example.org. 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.