The most common way of calculating the relative value of an REIT (real estate investment trust) like Boston Properties (BXP) 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. In the same vein, the price-to-FFO multiple is equivalent to the PE (price-to-earnings) ratio used in other industries.
Peer group price-to-FFO multiples
A closer look at Boston Properties’ TTM (trailing-twelve-month) price-to-FFO multiple shows that it is in line with its historical valuation. Over the past eight years, the company’s price ranged between 6.6x–27x of its FFO, with a current price-to-FFO multiple of around 21.8x. Boston Properties experienced its lowest price-to-FFO multiple in March 2009, whereas its highest multiple was recorded in March 2015.
As of November 23, 2015, Boston Properties’ stock was trading at a higher price-to-FFO multiple than some of its major peers. For example, Kilroy Realty Corporation (KRC) was trading at a price-to-FFO multiple of 19.8x as of the same date, and Douglas Emmett (DEI) was trading at a multiple of 18.4x. SL Green Realty Corporation (SLG) was trading at a multiple of 17.7x as of November 27. The industry average price-to-FFO multiple is 14.5x.
Higher multiple for Boston Properties
Historically, the company’s higher price-to-FFO multiple has been mainly due to the high quality of its office properties in premium markets. In addition, the company has been very consistent in generating higher FFO growth on a year-over-year basis. This is despite the fact that the company disposed $2.3 billion worth of properties in 2014.
The company’s lower leverage, coupled with its fixed-rate debt, also supported its valuation as of November 27. Consistently rising rental rates and higher occupancy levels have also been contributing to the premium valuation of Boston Properties.
Higher dividend yield
YTD (year-to-date) as of November 27, Boston Properties has offered a dividend yield of 5.68%, which is higher than its peers. Highwoods Properties (HIW) has offered a dividend yield of 3.90%, and Douglas Emmett (DEI) has offered a dividend yield of 2.71%. SL Green Realty Corporation (SLG) has offered the lowest dividend yield of 2.03%.
Boston Properties makes up ~2.3% of the total holdings of iShares US Real Estate ETF (IYR).
Continue to the next part of this series for a discussion of Boston Properties’ EV-to-EBITDA multiple.