The most common way of calculating the relative value of an REIT such as American Campus Communities 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 EPS (earnings per share) in other industries. Price-to-FFOx is equivalent to the PE (price-to-earnings) ratio used in other industries.
Peer group price-to-FFO multiple
A closer look at American Campus Communities’ (ACC) trailing 12 months price-to-FFO multiple shows that it’s in line with its historical valuation. Over the last eight years, American Campus Communities’ (ACC) price ranged from 12.5x to 27.7x of its FFO, with a current price-to-FFO multiple of around 16.6x. The company recorded its lowest price-to-FFO multiple in November 2008, while the highest multiple was in January 2008.
At the current multiple, American Campus Communities stock is trading at a lower price-to-FFO multiple compared to some of its major peers. For example, Essex Property Trust (ESS) is trading at a price-to-FFO multiple of 23.6x, followed by Equity Residential (EQR) at 23x and AvalonBay Communities (AVB) at 22.5x. The industry average price-to-FFO multiple is 20x.
Why a lower valuation for ACC?
Historically, a lower-than-average price-to-FFO multiple for ACC signifies that it wasn’t able to provide consistent capital value return to investors despite providing a higher dividend yield compared to some of its peers.
The company’s business model is mainly driven by short-term leases. As a result, the company may experience significantly reduced cash flows during the summer months at properties with lease terms shorter than 12 months. In addition, all of the company’s properties must be entirely released each year, exposing the company to increased leasing risk.
Although ACC has relatively lower leverage, a high percentage of variable debt exposes it to a rise in interest cost.
Higher dividend yield
Currently, American Campus Communities is offering a dividend yield of 3.9%, which is higher than Equity Residential (EQR) at 2.8%, AvalonBay Communities (AVB) at 2.8%, and Essex Property Trust (ESS) at 2.6%. The industry average dividend yield is 3.1%. American Campus Communities makes up 0.53% of the holdings of the iShares US Real Estate ETF (IYR).
In the next part of this series, we’ll look at American Campus Communities’ EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) multiple.