One Metric To Rule Them All: Charter Hall Retail Real Estate Investment Trust (ASX:CQR)

Charter Hall Retail Real Estate Investment Trust is a AU$1.9b small-cap, real estate investment trust (REIT) based in Sydney, Australia. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of CQR is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess CQR.

View our latest analysis for Charter Hall Retail Real Estate Investment Trust

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 CQR’s daily operations. For CQR, its FFO of AU$114m makes up 76% of its gross profit, which means the majority of its earnings are high-quality and recurring.

ASX:CQR Historical Debt, August 25th 2019
ASX:CQR Historical Debt, August 25th 2019

Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for CQR to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 12%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take CQR 9 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.

Next, interest coverage ratio shows how many times CQR’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 3.51x, it’s safe to say CQR is generating an appropriate amount of cash from its borrowings.

In terms of valuing CQR, 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. In CQR’s case its P/FFO is 16.85x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.

Next Steps:

Charter Hall Retail Real Estate Investment Trust 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 CQR:

  1. Future Outlook: What are well-informed industry analysts predicting for CQR’s future growth? Take a look at our free research report of analyst consensus for CQR’s outlook.
  2. Valuation: What is CQR 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 CQR is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.