REIT Valuation Multiples

Abstract

This paper examines the accuracy of valuation multiples in the Real Estate Investment Trusts (REITs) Industry. We evaluate fifteen multiples based on share price, enterprise value, and adjusted enterprise value. We construct benchmark multiples by grouping REITs into property categories. We place a given REIT into a group based on its property focus reported by SNL Financial and National Association of Real Estate Investment Trusts (NAREIT). The accuracy of valuation multiples are examined by using errors defined as the natural log of the estimated value to actual value ratio. Findings suggest that valuation errors are within a 15% threshold, mostly for enterprise value to EBITDA and enterprise value to EBIT multiples. In addition, we find that REIT specific multiples such as price-to-funds from operations, price-to- adjusted funds from operations, and price-to-NAV produce valuation errors less than that of earnings based multiples.