The EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is widely used for the valuation of real estate companies. EV (enterprise value) is the market value of equity and debt minus cash and cash equivalents. The EV/EBITDA ratio values the worth of the entire company and not just the equity portion.
Why is EV/EBITDA preferred?
The companies that raise debt to fund operations will have a lower PE (price-to-earnings) ratio than companies that raise a similar amount of equity, even though both types of companies have equivalent enterprise values. The company with the lower PE ratio appears cheaper than the company with the higher PE ratio. So, a company with a substantial amount of debt looks cheaper while a company with less debt and a higher equity portion looks pricier. A REIT is a capital-intensive business. Most of the REITs raise a lot of debt to fund their operations. As a result, the EV/EBITDA multiple becomes an additional tool to value REITs along with the price-to-FFO multiple.
Peer group EV/EBITDA multiple
A closer look at UDR’s EV/EBITDA multiple shows that it’s in line with its historical valuation. Over the last seven years, UDR’s EV/EBITDA was 12.9x–23.8x with a current EV/EBITDA of around 22.3x. UDR recorded its highest multiple in May 2015. It recorded its lowest multiple in 2009. The current industry average EV/EBITDA multiple is 20.7x.
UDR’s higher valuation in 2015 can be attributed to its overall portfolio quality and more favorable growth outlook. Recently, UDR acquired premium properties while disposing of older ones. For example, in 3Q15, UDR acquired six communities for $901 million in Washington, DC. It disposed of six communities in Norfolk, Virginia, for $221 million. UDR’s portfolio restructuring, targeting premium markets, bodes well for the company because it will likely improve its rental income. This is because the acquired properties are located close to transportation hubs, restaurants, and retail outlets.
Peer group comparison
UDR’s EV/EBITDA multiple is lower than its close competitors, although it’s higher than others. For example, AvalonBay Communities (AVB) trades at an EV/EBITDA multiple of 24.5x. It’s followed by Essex Property Trust (ESS) at 24.1x and Equity Residential (EQR) at 21.7x. Mid-America Apartment Communities (MAA) trades at 16.8x, Camden Property Trust (CPT) trades at 17.9x, and by Apartment Investment Management (AIV) trades at 17.7x. 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 investing in UDR through ETFs.