This month's REIT Focus is on Piedmont Office Realty Trust, Inc. (PDM), a publicly traded, self-managed real estate investment trust that primarily owns suburban office buildings. PDM is the general partner in the UPREIT general partnership, Piedmont Operating Partnership, L.P., that owns the assets of PDM. As of 9/30/12, PDM owned 74 office properties plus five buildings in unconsolidated joint ventures, composing 20.5 million sq. ft. and located in 17 major cities. Some of these cities include; Chicago, Washington D.C., New York, Boston and Dallas. PDM's tenants are primarily government and corporate entities including; the US Government, British Petroleum, US Bancorp, State of New York and General Electric. The average occupancy and rental rate of PDM's portfolio as of 9/30/12 was 87% and $26 per sq. ft., respectively. PDM was incorporated in the State of Maryland in 1997, became public in 2010 and is based in Atlanta, GA.
PDM has 168 million shares outstanding and a market capitalization of approximately $2.9 billion. PDM's management team includes Donald Miller, Chief Executive Officer, who has been with the company since 2003 and Robert Bowers, Chief Financial Officer, who has been with the company since 2004.
Select financial data for PDM as of the 9/30/12 10Q and for the period 1/1-9/30/12 is as follows (in millions where applicable):
|Real Estate Assets, Gross||$4,550|
|Line of Credit and Notes Payable||$1,436|
|Earnings Per Share||$.46|
|Cash Flow from Operations||$143|
|Unsecured Credit Facility ($500 with $149 used)||$351|
|Gross Real Estate Assets||32%|
|Real Estate Assets Per Sq. Ft.||$222|
|Dividend Yield ($.80/sh.)||4.5%|
|Revenue Per Above Annualized||$533|
|Less: Operating Expenses (excluding depr., amort. & int.)||$229|
|Projected Net Operating Income 2012||$304|
|Projected Inflation Rate||x103.5%|
|Projected NOI for Next Year||$315|
|Projected Cap Rate||8%|
|Projected Value of Company||$3,937|
|Less: Total Debt and Preferred Stock||($1,436)|
|Projected Value of Company Equity||$2,501|
|Projected Value Per Share||$15|
|Current Market Price Per Share||$17|
As shown above, our value for PDM is $15 per share versus a market price of $17 per share. Current cap rates for office properties per CBRE and Real Capital Analytics investment surveys are in the 6.5% to 9.5% range, depending on the tenancy, occupancy and location of the property. We have used a cap rate of 8% due to PDM's portfolio being primarily class B suburban office buildings that are only 87% leased. At its current price of $17 per share, PDM is trading at a 40% discount to many of its office REIT peers. The gross real estate assets, net income and funds from operations for 2010 to 9/30/12 are shown in the table below:
|Gross Real Estate Assets||$4,422||$4,615||$4,550|
|Funds from Operations||$282||$271||$175|
A five year price chart of PDM is shown below:
PDM's strengths include: low leverage, diversified portfolio of office properties, attractive dividend yield of 4.5% and attractive stock price. Weaknesses include: portfolio is only 87% leased which signals that properties were overbought and are in soft office markets, dividend has been cut from $1.76/sh. in 2008 to $1.20/sh. in 2009 and $.80/sh. in 2012 due to a decline in cash flow and there has been no growth in assets over that last three years and management needs to adopt a more aggressive acquisition program. PDM is the first public REIT sponsored by the Wells Real Estate Funds Group and they overpaid for many of the properties purchased in the early and mid 2000's. However, we like PDM as this discounted price and recommend the purchase of the stock. PDM should perform better once the economy starts growing, corporations start reinvesting funds in their business in 2013 and the demand for office space accelerates.
Management has to be more aggressive on its growth plan by acquiring new assets at attractive cap rates to grow their cash flow, funds from operations and dividend. PDM as well as most office and retail REITs are subject to long-term tenant leases with minimal annual rent increases. Therefore, they must pursue a proactive growth via acquisition strategy to increase the dividend and stock price.Disclosure:
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.