Enterprise value (or EV) to earnings before interest, taxes, depreciation, and amortization (or EBITDA) multiples are widely used for valuation of real estate companies. EV is the market value of equity and debt less cash and cash equivalents. The EV-EBITDA ratio values 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 a similar amount of equity, even though the two companies have equivalent enterprise values. The company with a lower PE ratio looks cheaper than the company with a higher PE ratio.
So in the case of a 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, and most of the 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 Camden Property Trust’s (CPT) EV-EBITDA multiple shows that it’s in line with its historical valuation. Over the last seven years, Camden’s EV-EBITDA ratio ranged from 11.9x–20.4x, with a current EV-EBITDA multiple of around 17.1x.
Camden recorded its highest EV-EBITDA multiple in December 2011, while the lowest multiple was recorded in July 2009. The current industry average EV-EBITDA multiple is 20.2x.
Peer group comparison
A peer group comparison shows that Camden’s EV-EBITDA multiple is lower than its close competitors and higher than some of the others. For example, AvalonBay Communities (AVB) trades at an EV-EBITDA multiple of 24.1x followed by Equity Residential (EQR) at 23.3x and Essex Property Trust (ESS) at 22.9x.
The other major competitors such as Mid-America Apartment Communities (MAA) trades at a lower EV-EBITDA multiple of 16.5x. The iShares Cohen & Steers REIT ETF (ICF) invests 1.6% of its portfolio in Camden Property Trust.
In the next part of this series, we’ll discuss investing in Camden Property Trust (CPT) through ETFs.