Choice Properties Real Estate Investment Trust is a CA$9.7b mid-cap, real estate investment trust (REIT) based in Toronto, Canada. 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 CHP.UN is unique and it has to adhere to different requirements compared to other non-REIT stocks. In this commentary, I’ll take you through some of the things I look at when assessing CHP.UN.
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 CHP.UN 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 CHP.UN, its FFO of CA$684m makes up 80% of its gross profit, which means the majority of its earnings are high-quality and recurring.
CHP.UN’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky CHP.UN is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 5.9%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take CHP.UN 17 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 CHP.UN’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 1.32x, CHP.UN is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
I also use FFO to look at CHP.UN’s valuation relative to other REITs in Canada 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. CHP.UN’s price-to-FFO is 14.3x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.
As a REIT, Choice Properties Real Estate Investment Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in CHP.UN, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for CHP.UN’s future growth? Take a look at our free research report of analyst consensus for CHP.UN’s outlook.
- Valuation: What is CHP.UN 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 CHP.UN 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.
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