The most common way of calculating the relative value of a REIT like UDR (UDR) is the price-to-FFO (funds from operations) multiple. FFO is widely used because it’s the main earnings metric for REITs. It’s similar to the EPS (earnings per share) in other industries. The price-to-FFO multiple is equivalent to the PE (price-to-earnings) multiple used in other industries.
Peer group price-to-FFO multiple
A closer look at UDR’s trailing-12-month price-to-FFO multiple shows that it’s in line with its historical valuation. Over the last eight years, UDR’s price ranged between 5.2x–23.4x of its FFO with a current price-to-FFO multiple of ~20.4x. UDR experienced its lowest price-to-FFO multiple during the housing crisis. It recorded its highest multiple in July 2011.
At this multiple, UDR’s stock is trading at a slightly lower price-to-FFO multiple compared to its major peers. For example, Essex Property Trust (ESS) is trading at a multiple of 22.9x. It’s followed by AvalonBay Communities (AVB) at 22.1x, Equity Residential (EQR) at 21.1x, and Camden Property Trust (CPT) at 16.2x.
The industry’s average price-to-FFO multiple is 18.9x.
UDR’s average multiple
Historically, a better-than-average price-to-FFO multiple for UDR meant that it was able to provide consistent capital value return along with reliable and steady dividend yield to investors. Currently, UDR offers a dividend yield of 3.1%. This is higher than some of its competitors’ yields like Equity Residential at 2.73%, AvalonBay Communities at 2.7%, and Essex Property Trust at 2.4%. The industry’s average dividend yield is 3%. The SPDR Dow Jones Wilshire Global Real Estate ETF (RWO) invests 0.9% of its portfolio in UDR.
In the next part of this series, we’ll discuss UDR’s EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple.