When it comes to the world of REITs, investors do tend to prioritize cash distributions, but they also benefit from a continued rise in share price. That rise in share price is usually in response to climbing cash distributions that, in turn, are driven by improved fundamentals. But there are some prospects in the REIT space they have exhibited trouble in achieving this kind of improvement. One interesting case is a firm called Piedmont Office Realty Trust (NYSE:PDM). Not only has financial performance not really improved from year to year, financial performance is failing to improve in the current fiscal year as well. To offset this some, shares of the company are trading on the cheap. But at the end of the day, I would say that this more or less balances out with the lackluster performance.
The last time I wrote about Piedmont Office Realty Trust was in an article published in August of this year. In that article, I rated the company a neutral prospect. Although I recognized that shares of the business were priced at low levels, I cited the lackluster performance as an issue and concluded that it was nothing more than just a decent prospect at this time. Having said that, I did indicate that if the company could experience some return to growth, shares might appreciate significantly. Since the publication of that article, the company has performed more or less along the lines of what I would have anticipated. Shares have generated a return for investors, distributions included, of 2.5%. This compares to the 3.7% achieved by the S&P 500 over the same period of time.
You might think that this failure to keep up with the broader market is indicative of poor performance. But I wouldn't say that is the case. True, for the full first three quarters of its 2021 fiscal year, the company did generate revenue of $390.55 million. That represents a decrease of 3.2% over the $403.50 million generated the same time one year earlier. However, in the latest quarter alone, revenue contracted a more modest 0.5%, dipping from $131.69 million to $131.07 million. For investors who are not familiar with the track record of this firm, it is worth knowing that revenue has remained in a very narrow range over at least the past five years leading up to 2021. At the low point, the company generated sales of just $525.97 million. And at the high point, revenue was $574.17 million. 2020 results came in slightly near the low end at $535.02 million. All recent performance shows is continued movement within that range.
While revenue has dipped slightly this year, profitability has ticked up some. For instance, FFO, or funds from operations, came in during the first nine months of 2021 at $182.41 million. That is slightly higher than the $181.70 million generated in the same nine months of 2020. On an adjusted basis, this figure rose from $101.13 million last year to $120.74 million so far this year. Another important metric to consider is NOI, or net operating income. According to management, this came in during the latest three quarters at $219.25 million. This compares to the $218.34 million achieved the same period of 2020. Meanwhile, operating cash flow has risen year over year, climbing from $138.81 million to $165.03 million. The only profitability metric that worsened year over year was EBITDA. According to management, this came in at $220.60 million. That is down from the $224.63 million achieved the same time last year.
Management has provided a little bit of guidance for the current fiscal year. At present, they are forecasting FFO of around $245 million. If this comes to fruition, and if we apply the same kind of year over year growth rate to other profitability metrics, then things are looking up slightly relative to 2020. Adjusted FFO would be $147 million, up from the $137.42 million seen in 2020. Operating cash flow would have risen from $193.28 million to $206 million, and NOI would have increased from $319.46 million to $341 million. And finally, EBITDA of $315 million would beat out the $295.21 million achieved last year.
Taking these figures, we can effectively price the company. At present, the firm is trading at a forward price to FFO multiple of 9.5. This is up slightly from the 9.1 when I last wrote about the firm. On an adjusted basis, this multiple would be a bit higher at 15.8. But I did not calculate this adjusted equivalent in my prior article on the firm. The price to NOI multiple with equal 6.8, up from 6.5 previously. The price to operating cash flow multiple would rise from 10.8 to 11.3, while the EV to EBITDA multiple would increase modestly from 12.5 to 12.6.
To put these figures in perspective, I decided to compare the company using two of these metrics to the five highest rated of its peers as defined by Seeking Alpha’s Quant platform. On a price to operating cash flow basis, these companies ranged from a low of 10.8 to a high of 14.5. Only one of the five companies was cheaper than Piedmont Office Realty Trust is today. I then did the same thing using the EV to EBITDA approach. This gave me a range of 9.1 to 21.2. In this scenario, one company was cheaper than our target while one other was tied with it.
|Company||Price / Operating Cash Flow||EV / EBITDA|
|Highwoods Properties (HIW)||12.1||12.6|
|SL Green Realty Corp. (SLG)||12.8||9.2|
|Corporate Office Properties (OFC)||10.8|| |
|Douglas Emmett (DEI)||14.5||21.2|
|Orion Office REIT (ONL)||N/A||16.0|
At this moment in time, I cannot help but to think that Piedmont Office Realty Trust continues to belong in the low-price category of stocks. The company is exhibiting no upward momentum that would justify upside and shares are not priced cheap enough today that they would be attractive even without growth. Another thing to consider is that the net leverage ratio of the company is 5.2. That is far from awful, but it could use some improvement. All things considered, I do believe the company could make an attractive opportunity if it can start exhibiting growth. But until that transpires, I don't see much potential for it relative to the broader market.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.