DiamondRock Hospitality Company is a US$2.46b 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 DRH.
Funds from Operations (FFO) is a higher quality measure of DRH’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 DRH, its FFO of US$204.5m makes up 77.6% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether DRH 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 DRH to pay off its debt using its income from its main business activities, and gives us an insight into DRH’s ability to service its borrowings. With a ratio of 21.8%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take DRH 4.59 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.
I also look at DRH’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 5.32x, it’s safe to say DRH is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at DRH’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 DRH’s case its P/FFO is 11.9x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
DiamondRock Hospitality 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 DRH:
- Future Outlook: What are well-informed industry analysts predicting for DRH’s future growth? Take a look at our free research report of analyst consensus for DRH’s outlook.
- Valuation: What is DRH 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 DRH 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.
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