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Braemar Hotels & Resorts, Inc. is a US$393m small-cap, real estate investment trust (REIT) based in Dallas, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how BHR’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess BHR.
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 BHR 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 BHR, its FFO of US$71m makes up 61% of its gross profit, which means the majority of its earnings are high-quality and recurring.
BHR’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 BHR 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 7.2%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take BHR 13.94 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 BHR’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 1.31x, BHR is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
In terms of valuing BHR, 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 BHR’s case its P/FFO is 5.55x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
As a REIT, Braemar Hotels & Resorts offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in BHR, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for BHR’s future growth? Take a look at our free research report of analyst consensus for BHR’s outlook.
- Valuation: What is BHR 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 BHR 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.
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 firstname.lastname@example.org. 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.