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CDL Hospitality Trusts is a S$1.8b small-cap, real estate investment trust (REIT) based in Singapore, Singapore. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how J85’s business operates and also how we should analyse its stock. Below, I’ll look at a few important metrics to keep in mind as part of your research on J85.
View our latest analysis for CDL Hospitality Trusts
Funds from Operations (FFO) is a higher quality measure of J85’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 J85, its FFO of S$139m makes up 91% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether J85 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 J85 to pay off its debt using its income from its main business activities, and gives us an insight into J85’s ability to service its borrowings. With a ratio of 15%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take J85 6.69 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 J85’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 6.23x, it’s safe to say J85 is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at J85’s valuation relative to other REITs in Singapore 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. J85’s price-to-FFO is 13.26x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.
Next Steps:
CDL Hospitality Trusts 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 J85: