You May Have Been Looking At RLJ Lodging Trust (NYSE:RLJ) All Wrong
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RLJ Lodging Trust is a US$3.3b mid-cap, real estate investment trust (REIT) based in Bethesda, 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. Below, I’ll look at a few important metrics to keep in mind as part of your research on RLJ.
View our latest analysis for RLJ Lodging Trust
Funds from Operations (FFO) is a higher quality measure of RLJ’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 RLJ, its FFO of US$261m makes up 57% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether RLJ 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 RLJ to pay off its debt using its income from its main business activities, and gives us an insight into RLJ’s ability to service its borrowings. With a ratio of 9.0%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take RLJ 11.06 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 RLJ’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 3.33x, it’s safe to say RLJ is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at RLJ’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 RLJ’s case its P/FFO is 12.51x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
Next Steps:
As a REIT, RLJ Lodging Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in RLJ, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for RLJ’s future growth? Take a look at our free research report of analyst consensus for RLJ’s outlook.
Valuation: What is RLJ 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 RLJ 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 editorial-team@simplywallst.com.
