Apple Hospitality REIT, Inc. is a US$3.7b mid-cap, real estate investment trust (REIT) based in Richmond, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. In this commentary, I'll take you through some of the things I look at when assessing APLE.
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 APLE’s daily operations. For APLE, its FFO of US$405m makes up 70% of its gross profit, which means the majority of its earnings are high-quality and recurring.
APLE'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 APLE 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 29%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take APLE 3.49 years to pay off using operating income alone, which is reasonable, given that long term debt is a multi-year commitment.
Next, interest coverage ratio shows how many times APLE’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 7.91x, it’s safe to say APLE is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at APLE'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. In APLE’s case its P/FFO is 9.06x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
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. Apple Hospitality REIT 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 APLE’s future growth? Take a look at our free research report of analyst consensus for APLE’s outlook.
- Valuation: What is APLE 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 APLE 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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