The EV (enterprise value)-to-earnings before EBITDA (interest, taxes, depreciation, and amortization) multiple is widely used in the valuation of REIT (real estate investment trusts). EV represents the market value of a company’s equity and debt, minus its cash and cash equivalents. In this way, the EV-to-EBITDA ratio calculates the value of an entire company and not just the equity portion.
Why is EV-to-EBITDA preferred?
The company that raises its debt in order to fund operations will have a lower PE (price-to-earnings) ratio, or multiple, than companies that raise the similar amount of equity, even though the two companies have equivalent enterprise values. The company with lower PE ratio, then, may look cheaper than the company with the higher PE ratio.
In the case of the PE ratio, the company with a substantial amount of debt may look cheap, whereas the company with less debt and higher equity portion may look pricey. But we should bear in mind that the REIT space is capital intensive, and because most REITs raise a lot of debt in order to fund their operations, EV-to-EBITDA becomes an additional tool when valuing REITs, along with the price-to-FFO multiple.
Peer group EV-to-EBITDA multiples
A closer look at Boston Properties’ (BXP) EV-to-EBITDA multiple shows that it is in line with its historical valuation. Over the past six years, Boston Properties’ EV-to-EBITDA ranged between 12.5–23.4x, with an EV-to-EBITDA multiple of around 19.9x as of November 27. Boston Properties recorded its highest EV-to-EBITDA multiple in July 2013, whereas its lowest multiple was recorded in March 2009. The industry average EV-to-EBITDA multiple as of November 27 was 20.2x.
Peer group comparisons with Boston Properties
A peer group comparison shows that Boston Properties EV-to-EBITDA multiple is in line with some close competitors but higher than others. For example, Kilroy Realty Corporation (KRC) was trading at an EV-to-EBITDA multiple of 22.2x as of November 27, and SL Green Realty Corporation (SLG) was trading at a multiple of 21.1x. By comparison, Douglas Emmett (DEI) was trading at an EV-to-EBITDA multiple of 20.2x as of the same date. Meanwhile, Highwoods Properties (HIW) was trading at a lower EV-to-EBITDA multiple of 16.3x.
The iShares Cohen & Steers REIT ETF (ICF) invests ~4.6% of its total portfolio in Boston Properties.
Now let’s wrap up this series by analyzing investment possibilities in Boston Properties through ETFs.