PotlatchDeltic Corporation is a US$2.4b mid-cap, real estate investment trust (REIT) based in Spokane, 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 PCH.
A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT’s main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much PCH actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For PCH, its FFO of US$163m makes up 78% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether PCH 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 PCH to pay off its debt using its income from its main business activities, and gives us an insight into PCH’s ability to service its borrowings. With a ratio of 28%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take PCH 3.52 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 PCH’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 6.01x, it’s safe to say PCH is generating an appropriate amount of cash from its borrowings.
In terms of valuing PCH, 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. PCH’s price-to-FFO is 14.51x, compared to the long-term industry average of 16.5x, meaning that it is slightly 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. PotlatchDeltic 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 PCH’s future growth? Take a look at our free research report of analyst consensus for PCH’s outlook.
- Valuation: What is PCH 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 PCH 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.