EV-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) multiples are widely used for valuation of real estate companies. EV is the market value of equity and debt less cash and cash equivalents. EV-EBITDA ratios value the worth of the entire company and not just the equity portion.
Why EV-EBITDA is preferred
The company that raises debt to fund operations will have a lower PE (price-to-earnings) ratio than companies that raise the similar amount of equity, even though the two companies have equivalent enterprise values. The company with a lower PE ratio looks cheaper than a company with a higher PE ratio.
In the case of PE multiple, a company with a substantial amount of debt looks cheaper, while a company with less debt and a higher equity portion looks expensive. An REIT is a capital-intensive business. Most REITs raise a lot of debt to fund their operations. So EV-EBITDA becomes an additional tool to value REITs along with the price-to-FFO (funds from operations) multiple.
Peer group EV-EBITDA multiple
A closer look at AIMCO’s (AIV) EV-EBITDA multiple shows that it’s in line with its historical valuation. Over the last seven years, AIMCO’s (AIV) EV-EBITDA ranged from 10.5 to 18.2x, with a current EV-EBITDA multiple of around 16.9x.
AIMCO (AIV) recorded its highest multiple in March 2015. It recorded its lowest multiple in January 2009. The current industry average EV-EBITDA multiple is 19.9x. The lower valuation for AIMCO can be attributed to expected slower growth in FFO and NOI (net operating income).
Peer group comparison
A peer group comparison shows that AIMCO’s (AIV) EV-EBITDA multiple is lower than its close competitors. For example, AvalonBay Communities (AVB) trades at an EV-EBITDA multiple of 23.7x, followed by Equity Residential (EQR) at 22.8x and Essex Property Trust (ESS) at 22.5x.
Other major competitors such as Mid-America Apartment Communities (MAA) and Camden Property Trust (CPT) are trading at an EV-EBITDA multiple of 16.4x and 17x, respectively. AIMCO forms 1.0% of the holdings of the SPDR Dow Jones REIT ETF (RWR).
In the next part of this series, we’ll look at investing in AIMCO through ETFs.