CDL Hospitality Trusts is a S$1.9b small-cap, real estate investment trust (REIT) based in Singapore, Singapore. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how J85’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 J85.

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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 J85’s daily operations. For J85, its FFO of S$123m makes up 83% of its gross profit, which means the majority of its earnings are high-quality and recurring.

J85'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 J85 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 12%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take J85 8.21 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 J85’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 5.57x, it’s safe to say J85 is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at J85's valuation relative to other REITs in Singapore 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. In J85’s case its P/FFO is 15.59x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.

Next Steps:

In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. CDL Hospitality Trusts can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:

1. Future Outlook: What are well-informed industry analysts predicting for J85’s future growth? Take a look at our free research report of analyst consensus for J85’s outlook.

2. Valuation: What is J85 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 J85 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.