REIT Focus: Piedmont Office Realty Trust, Inc.

| About: Piedmont Office (PDM)

Summary

PDM is an office REIT that owns 69 office properties, two development assets and an office building in a joint venture, with gross leasable area of 18.9 million sq. ft.

PDM's properties are located in seven strategic markets throughout the country. Portfolio occupancy as of Q4 2015 was 91.5% and YoY net operating income growth was 4.4%.

We are recommending the purchase of the stock of PDM due to its value at NAV, low leverage at 41% of enterprise value, investment grade credit rating and 4.4% dividend.

This REIT Review is on Piedmont Office Realty Trust, Inc. (NYSE:PDM), a publicly traded REIT that is engaged in the acquisition, development, management and ownership of primarily Class A commercial office properties.

Property Information

As of Q4 2015, PDM owned 69 office properties, one redevelopment asset, two development assets, and one office building in an unconsolidated joint venture with total gross rentable area of approximately 18.9 million sq. ft. PDM's office properties are located in seven strategic markets including; the West (5% of lease revenue), the Southwest (12% of lease revenue), the Southeast (15% of lease revenue), the Midwest (23% of lease revenue), the Mid-Atlantic (22% of lease revenue) and the Northeast (23% of lease revenue). Major tenants include the U.S. Government (8.4% of lease revenue), State of New York (4.5% of lease revenue), US Bancorp (4% of lease revenue) and Independent Blue Cross (3.3% of lease revenue). As of Q4 2015, portfolio occupancy was 91.5% and the same-store YoY net operating income growth was 4.4%.

Major Events

In 10/15, PDM sold the Aon Center in Chicago, IL for $712 million. The property was purchased by PDM for $465.2 million in 2003. The proceeds were generally used to invest in new real estate assets, repay debt and repurchase common stock.

A portion of the proceeds from the Aon Center sale above were used to purchase two office properties in 11/15; SunTrust Center in Orlando, FL and Galleria 300 in Atlanta, GA, for a combined price of $259.1 million.

Corporate Data

PDM is traded on the NYSE, is incorporated in Maryland, and is located in Johns Creek, GA. PDM's debt is rated Baa2 by Moody's and BBB by Standard and Poor's. PDM has a market capitalization of approximately $2.92 billion. PDM owns 99.9% and is sole general partner of its UpREIT partnership, Piedmont Operating Partnership, L.P.

Management

Donald A Miller, 53, CFA, CEO and Director

Mr. Miller has served as the Chief Executive Officer, President, and a member of the board of directors of PDM since 2007. From 2003 to 2007, Mr. Miller was the head of real estate activities at Wells Real Estate Funds, Inc. In such capacity, he was responsible for directing all aspects of the acquisitions, asset management, dispositions, property management, and construction groups. From 2001 to 2003, Mr. Miller headed the U.S. equity real estate operations of Lend Lease, a leading international commercial real estate property group where he had worked since 1994. Prior to Lend Lease, Mr. Miller was responsible for regional acquisitions for Prentiss Properties Realty Advisors, a predecessor entity to Prentiss Properties Trust, a publicly traded REIT. Mr. Miller is also a Chartered Financial Analyst. Mr. Miller received a B.A. from Furman University in Greenville, South Carolina and serves on the Board of Directors of Pacolet Milliken Enterprises, a Spartanburg South Carolina investment company specializing in real estate and energy. From 2012 to 2015, Mr. Miller served on the Board of Governors for the National Association of Real Estate Investment Trusts and is currently a member of the Urban Land Institute, and the National Association of Industrial and Office Properties.

Robert E. Bowers, 59, CFO

Mr. Bowers has served as our Chief Financial Officer since 2007. A veteran of the public financial services industry, including having served as Chief Financial Officer for three other public companies, Mr. Bowers' experience includes investor relations, debt and capital offerings, mergers and acquisitions, asset allocation, financial management and strategic planning. Mr. Bowers is also responsible for management of our information technology, risk management and human resource functions. From 2004 until 2007, Mr. Bowers served as Chief Financial Officer and Vice President of Wells Real Estate Funds, Inc. and was a Senior Vice President of Wells Capital. Mr. Bowers was Chief Financial Officer and Director of NetBank, Inc. from 1997 to 2002. From 1984 to 1996, Mr. Bowers was Chief Financial Officer and Director of Stockholder Systems, Inc. an Atlanta, Georgia-based financial applications company and its successor, CheckFree Corporation. Mr. Bowers has provided strategic financial counsel to a range of organizations, including venture capital funds, public corporations and businesses considering listing on a national securities exchange. Mr. Bowers is a member of NAREIT and a CPA who began his career in 1978 with Arthur Andersen & Company in Atlanta.

Raymond L. Owens, 57, EVP and CIO

Mr. Owens serves as our Executive Vice President and Chief Investment Officer, having been responsible for Piedmont's acquisition, disposition and financing activities since 2007. Prior to joining us, Mr. Owens spent five years as a Managing Director-Capital Markets for Wells Real Estate Funds, Inc. where he oversaw its western regional acquisition team and its real estate finance team. Prior to joining Wells Real Estate Funds, Inc., Mr. Owens served as Senior Vice President for PM Realty Group from 1997 to 2002, overseeing all management operations in Atlanta, Washington, D.C., Chicago, and New York. Before joining PM Realty Group, Mr. Owens served as Vice President at General Electric Asset Management, where he managed and negotiated dispositions as well as third-party, nonrecourse financing for real estate assets. Mr. Owens is a member of the National Association of Real Estate Investment Managers, the National Association of Industrial & Office Properties, and the Urban Land Institute.

Ownership

Top Institutional Holders:

Shares

%

FMR, LLC

13,258,785

9.14

Vanguard Specialized REIT Index Fund

11,042,507

7.61

Invesco, Ltd.

6,570,135

4.53

AEW Capital Management, LP

6,312,472

4.35

American Century Companies, Inc.

6,279,291

4.33

Ownership Breakdown

% of Shares Held by All Insider and 5% Owners

1

% of Shares Held by Institutional & Mutual Fund Owners

84

Number of Institutions Holding Shares

239

All amounts above per Yahoo Finance

Financial Analysis and Valuation

Select financial data for PDM as of the 2015 10K and supplemental information

(in millions where applicable):

Financial Data

Amounts

Real Estate Assets, Gross

$4,710

Total Assets

$4,434

Property Debt (at a weighted average interest rate of approximately 3.55%)

$2,029

Common Stockholders' Equity

$2,195

Revenue

$584

Net Income

$172

Net Income Per Share

$1.15

Cash Flow from Operations

$217

Unsecured Line of Credit Facility ($500 million with $0 million used)

$500

Market Capitalization

$2,920

Property Debt to:

Gross Real Estate Assets

43%

Market Capitalization

69%

Enterprise Value

41%

Dividend and Yield ($.84/sh.)

4.2%

Valuation Methodology

2015 Revenue

$584

Less: 2015 Operating Expenses Annualized (excluding depreciation, amortization, interest expense and less G&A expenses)

273

Annualized Net Operating Income 2015

$312

Projected Inflation Rate at 3.5%

x1.035

Projected Forward NOI for Next Year

$323

Projected Average Cap Rate

7%

Projected Value of Real Estate Assets

$4,614

Add: Net Operating Working Capital (less goodwill and at book value)

353

Total Projected Asset Value of Company

$4,967

Less: Total Debt Per Above

2,029

Projected Net Asset Value of the Company

$2,938

Common Shares Outstanding-145M Shares (145M common shares)

Projected NAV Per Share

$20

Market Price Per Share on 4/15/16

$20

Premium (Discount) to NAV

0%

Financial Metrics

The gross real estate assets, property debt, revenues, net income, funds from operations, return on invested capital and dividends per share for the years 2010 through 2015 are shown in the table below:

(millions except per share amounts) amounts)

2010

2011

2012

2013

2014

2015

Gross Real Estate Assets

$4,565

$4,615

$4,462

$5,001

$5,043

$4,710

Property Debt

$1,402

$1,472

$1,410

$1,993

$2,269

$2,029

Revenues

$533

$541

$525

$554

$566

$584

Net Income

$120

$225

$93

$98

$43

$172

Funds from Operations (FFO)

$281

$66

$271

$243

$240

$230

$241

Return on Invested Capital (1)

8.2%

8.1%

6.4%

7.2%

6.3%

6.8%

Dividends Paid Per Share

$1.26

$1.26

$.80

$.80

$.81

.84(2)

(1) This is the ratio of cash provided by operations plus interest expense divided by stockholder's equity plus property debt, less cash and measures the return the REIT is earning on its invested capital.

(2) Dividend is currently $.21 per quarter.

The total return of PDM year to date and through five years is shown in the chart below per NAREIT:

PDM Total Return

YTD (2/16)

1-yr

3-yr

5-yr

-1.56%

5.02%

2.63%

3.56%

As shown above, our net asset value per share for PDM is $20/sh., compared to a market price of $20/sh. Current average cap rates for class A office properties per our industry experience and CBRE's Cap Rate Survey are in the 4% to 8% range, depending on the location, quality of the property and tenancy. We have used an average cap rate of 7% due to PDM's portfolio being a well-diversified office portfolio.

Valuation Analysis

PDM's strengths, concerns and recommendation are as follows:

Strengths:

· Solid diversified portfolio of Class A office properties.

· Investment grade credit rating.

· Low leverage at 41% of enterprise value.

· Solid return on invested capital.

· Attractive dividend yield of 4.2%.

· Stock priced at NAV.

· YoY net operating income growth of 4.4%.

Concerns:

· Gross real estate assets have only grown 3% since 2010.

· Dividend has only grown 5% since 2012.

Recommendations:

PDM is a solid office REIT with a well-diversified portfolio of Class A office properties and our recommendations are as follows:

  • We are recommending the purchase of the stock at NAV, however, management needs to be more aggressive in growing assets, which will increase cash flow, FFO, the dividend and the stock price.
  • PDM should increase the dividend as the cash flow from operations for 2015 was $217 million and greater than common stock dividends of $126 million and capital expenditures on existing properties of $83 million.

A five-year price chart of PDM is shown below.

Disclosure: I am/we are long VARIOUS REITS IN AN ETF.

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.