Covivio Hotels Société anonyme is a €3.1b mid-cap, real estate investment trust (REIT) based in Paris, France. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how COVH’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 COVH.
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 COVH’s daily operations. For COVH, its FFO of €257m makes up 89% of its gross profit, which means the majority of its earnings are high-quality and recurring.
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 COVH 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 9.0%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take COVH 11 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 COVH’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 3.35x, it’s safe to say COVH is generating an appropriate amount of cash from its borrowings.
In terms of valuing COVH, 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. COVH’s price-to-FFO is 12.23x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
Covivio Hotels Société anonyme 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 COVH:
- Future Outlook: What are well-informed industry analysts predicting for COVH’s future growth? Take a look at our free research report of analyst consensus for COVH’s outlook.
- Valuation: What is COVH 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 COVH 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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