Price to FFO multiple
The most common way of calculating the relative value of a REIT such as EdR is the price-to-FFO (fund from operations) multiple. FFO is widely used because it is the main earnings metric for REITs similar to EPS (earnings per share) in other industries. The price-to-FFO ratio is equivalent to the PE (price-to-earnings) ratio used in other industries.
Peer group price-to-FFO multiple
A closer look at EdR’s (EDR) trailing-12-month price-to-FFO multiple shows that it is in line with its historical valuation. Over the last eight years, EdR’s price ranged between 3.3x to 24.6x of its FFO with a current price-to-FFO multiple of around 19.4x. The company recorded its lowest price-to-FFO multiple in November 2008 while the highest multiple was in December 2011.
At the current multiple, EdR’s stock is trading higher than the industry average price-to-FFO multiple but lower than some of its peers. For example, Equity Residential (EQR) is trading at a price-to-FFO multiple of 23.1x, followed by AvalonBay Communities (AVB) at 22.4x and Essex Property Trust (ESS) at 21.6x. The industry average price-to-FFO multiple is 19x.
EdR’s lower valuation compared to some of its peers despite reporting good growth is due to a number of factors. Though the company has relatively lower leverage, a high percentage of variable debt exposes it to a rise in interest cost, which affects its valuation. In addition, lower occupancy level compared to most of its peers also negatively affected its valuation.
Highest dividend yield
Currently, EdR offers the highest dividend yield of 4.1% in its peer group. AvalonBay Communities (AVB) offered a lower dividend yield of 2.82%, followed by Equity Residential (EQR) at 2.8%, and Essex Property Trust (ESS) at 2.6%. The industry average dividend yield is 3.1%. EdR makes up 0.31% of the iShares Core S&P Small-Cap ETF (IJR).
In the next part of this series, we’ll discuss EdR’s EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) multiple.