The enterprise value (or EV) to earnings before interest, taxes, depreciation, and amortization (or EBITDA) multiple is widely used for valuation of real estate companies. EV is the market value of equity and debt minus cash and cash equivalents. EV-EBITDA ratio values the worth of the entire company and not just the equity portion.
Why EV-EBITDA is preferred
Companies that raise debt to fund operations have lower PE ratios than companies that raise a similar amount of equity, even though the equivalent enterprise values are similar. Companies with a lower PE ratio look cheaper than companies with higher PE ratios. So in the case of PE multiples, a company with a substantial amount of debt looks cheaper while a company with less debt and a higher equity portion looks pricy. REITs are capital-intensive, and most REITs raise a lot of debt to fund their operations. Thus, EV-to-EBITDA becomes an additional tool to value REITs along with the price-to-FFO (funds from operations) multiple.
EdR’s EV/EBITDA multiple is close to industry average
A closer look at EdR’s (EDR) EV-EBITDA multiple shows that it is in line with its historical valuation. Over the last five years, EdR’s EV-EBITDA ranged between 16.3x–25.5x with a current EV-EBITDA multiple of around 21.7x. EdR recorded its highest EV-EBITDA multiple in June 2014 while the lowest multiple was recorded in April 2010. The current industry average EV/EBITDA multiple is 21.5x.
Peer group comparison
The peer group comparison shows that EdR’s EV-EBITDA multiple is lower than some of its close competitors but higher than others. For example, AvalonBay Communities (AVB) trades at an EV-EBITDA multiple of 24.7x followed by Equity Residential (EQR) at 23.6x and Essex Property Trust (ESS) at 23.4x. American Campus Communities (ACC) trades at a lower EV-EBITDA multiple of 19.6x. The SPDR DJ Wilshire Global Real Estate ETF (RWO) invests 0.20% of its portfolio in EdR.
In the next part of this series, we’ll discuss investing in EdR through ETFs.