InnSuites Hospitality Trust is a US$21m small-cap, real estate investment trust (REIT) based in Phoenix, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how IHT’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 IHT.
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 IHT’s daily operations. For IHT, its FFO of US$9.7m makes up 168% of its gross profit, which means the majority of its earnings are high-quality and recurring.
IHT’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 IHT 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 77%, the credit rating agency Standard & Poor would consider this as minimal risk. This would take IHT around a year to pay off using operating income alone, which is reasonable, given that long term debt is a multi-year commitment.
I also look at IHT’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 14.79x, its safe to say IHT is producing more than enough funds to cover its upcoming payments.
I also use FFO to look at IHT’s valuation relative to other REITs in United States 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. IHT’s price-to-FFO is 2.16x, compared to the long-term industry average of 16.5x, meaning that it is highly undervalued
InnSuites Hospitality 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 IHT:
- Management: Who are the people running the company? Experienced management and board are important for setting the right strategy during a volatile market. Take a look at information on IHT’s executive and directors here.
- 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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