The price-to-FFO (funds from operation) ratio is the most popular method of measuring the relative valuation of real estate investment trusts (or REIT) such as Essex Property Trust (ESS). FFO is the most widely used metric for evaluating REITs.
An REIT’s price-to-FFO and PE (price-to-earnings) ratios are used to calculate the relative valuation of its stock.
Peer group price-to-FFO multiple
Essex Property’s current price-to-FFO ratio is 21.94x. Traditionally, a high price-to-FFO ratio is an implication that a company has returned capital value consistently and has also distributed reliable, steady dividend yields to investors.
Essex has undertaken several steps toward boosting its market presence. Apart from positioning its portfolios in high-demand Class A cities, the company also regularly undertakes several development and redevelopment programs in order to maintain the standard of its properties. These strategic initiatives and its enhanced guidance for 2017 may have been responsible for the recent rally in its share price, due to which there was a spike in its price-to-FFO ratio.
In terms of price-to-FFO ratio, ESS is trading on par with most of its peers. While ESS has a price-to-FFO ratio of 21.94x, AvalonBay Communities (AVB), Equity Residential (EQR), and UDR (UDR) have price-to-FFO ratios of 22.4x, 21.4x, and 21.1x, respectively.
Peers’ dividend yields
Essex Property currently offers a next-12-month dividend yield of 3%, which is in line with its close competitors. AvalonBay, Equity Residential, and UDR offer next-12-month dividend yields of 2.9%, 3%, and 3.2%, respectively.
Measuring net asset value (or NAV) is another way to determine the valuation of an REIT. AvalonBay has a NAV of -5.7%, ESS has a NAV of -1.6%, and EQR has a NAV of -2.9%.
The iShares Residential Real Estate Capped ETF (REZ) has a market cap–weighted index that has a wide product portfolio covering industries such as healthcare, self-storage, and residential REITs. REZ has a NAV of $65.82.
In the final article in this series, we’ll see how analysts view Essex Property.