Piedmont Office Realty Trust Stock: Continued Poor (NYSE: PDM)

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Generally speaking, REITs can offer stable and attractive long-term prospects, especially for investors who want attractive cash returns on their investments. But not all REITs fit this profile. Some are experiencing gradual declines in revenue and profitability. And others just meander from year to year, generating fairly consistent cash flow. An example of a REIT that has failed to gain traction in recent years has been Piedmont Office Real Estate Trust (NYSE: PDM). Even before the COVID-19 pandemic, this perspective struggled to really do much. And while the company’s revenue has held up well during the recession and since, it has yet to demonstrate its ability to return to growth. A positive point about the company is that the shares do not seem too expensive. Depending on how you look at them, they are either quite valued or slightly undervalued. But given all the circumstances surrounding the company, I don’t believe it offers investors anything but mediocrity to get ahead.

The kind of performance I expected

The last time I wrote about Piedmont Office Realty Trust was in December 2021. At that time, I noted for investors that the company was trading low. That said, I also claimed it was cheap for a reason. And that reason had to do with the fact that the company hadn’t really shown any real growth in recent years and, due to the pandemic, had experienced a temporary drop in profitability. In the end, I felt like the low stock price and lack of growth balanced each other out, leading me to view the company as a “stockpile.” Since then, stocks have moved more or less in the direction I would have anticipated. While the S&P 500 fell 4.5% in value, shares of Piedmont Office Realty Trust performed slightly worse, posting a total loss of 6.3%.

Fast forward to today, and we now have a look at the company’s performance for the Financial year 2021 in its entirety. We also have management advice what fiscal 2022 will look like. For 2021, the company’s revenue was $528.7 million. That compares to the $535 million the company announced a year earlier. This decrease is largely explained by a 1% drop in the occupancy rate while the weakness of the office space market persists. Heading into fiscal 2022, management gave no revenue guidance. But they said occupancy, excluding asset sales and purchases, should be around 88% for the year.

Historical financial data

Author – SEC EDGAR Data

Although the company’s revenue has deteriorated in 2021, the company has improved in some areas. Take, for example, basic FFO or funds from operations. During the year, this measure amounted to $245.4 million. That’s a slight increase from the $238.9 million generated at the same time a year earlier. Other profitability indicators have also strengthened year on year. Adjusted FFO, for example, fell from $137.4 million in 2020 to $160.1 million last year. Operating cash flow increased from $193.3 million to $242.2 million. And the company’s EBITDA increased slightly from $295.2 million to $297.7 million. The only profitability metric that matters where the company reported a year-over-year decline was NOI, or net operating income. According to management, this went from $319.5 million to $317.6 million.

Financial forecast

Author – SEC EDGAR Data

Some investors optimistic about the company might think that now that the worst of the pandemic is long over, there could be a significant improvement in the fundamental state of the company. But I consider that unlikely. In fact, I believe we are destined to see more twists and turns in the foreseeable future. Although the company’s asset rental rate is expected to climb to 88% this year, from the 86% the company reported at the end of its 2021 fiscal year, management has already made it clear that, ignoring some recent changes in the portfolio , that it tends to balance asset sales and purchases. In total, sales and purchases individually are expected to be between $350 million and $450 million. When you’re just recycling assets, it makes getting back to growth terribly difficult.

Fortunately, that doesn’t mean the company won’t see any traction. The company currently expects same-store ROI to increase by 1% to 3%. As a result, the company currently expects base FFOs to be between $1.97 and $2.07. Halfway through, this implies an FFO of around $250 million. This is slightly higher than what the company achieved in 2021. Applying the same type of growth expectation to other profitability measures would yield an adjusted FFO of $163.1 million, an NOI of $323.6 million and operating cash flow of $246.7 million. Meanwhile, that should translate to an EBITDA of approximately $303.3 million.

While it’s nice to see some improvement, we’re left with the fact that these cash flow numbers are largely flat compared to what the company has achieved in previous years. Again, investors are left with another year of virtually zero growth in the grand scheme of things. It is for this reason that the shares of the company are as cheap as they are today. Using our 2021 numbers, the company is trading at a price against the FFO multiple of 8.5. This only drops modestly to 8.3 based on 2022 estimates. The adjusted FFO multiple would drop from 13 using 2021 numbers to 12.8. The price of the multiple NOI would drop from 6.5 to 6.4. The price/operating cash flow ratio would drop from 8.6 to 8.4. And the EV/EBITDA multiple would drop from 13.3 to 13. As the chart below illustrates, this price isn’t much different from how the company was priced based on my own estimates for its fiscal year 2021 when I last wrote about the company. And in some ways, the company actually seems slightly more expensive.

Trading multiples

Author – SEC EDGAR Data

If Piedmont Office Realty Trust shares were trading at a substantial discount to similar companies, it could well be worth buying. However, this is also not the case. Consider just two of the metrics we looked at. Based on price to operating cash flow, shares of five companies similar to Piedmont Office Realty Trust that I reviewed traded in a range of 11.5 to 23. In this case, Piedmont Office Realty Trust was the cheapest of the bunch. However, using the EV to EBITDA approach, the range for the five companies was 11.3 to 20.8. And in this case, two of the five companies were cheaper.

Company Price / Operating Cash

EV / EBITDA

Piedmont Office Real Estate Trust 8.6 13.3
Highwoods Properties (HIW) 11.5 11.3
SL Green Realty Corp (SLG) 23.0

12.4

Headquarters Properties (OFC) 12.7 18.6
Douglas Emmett (DEI) 13.0 20.8
Orion Office REIT (ONL) N / A

15.0

Carry

Based on all the data provided, I don’t think Piedmont Office Realty Trust is a bad company. Stocks are cheap on an absolute basis, but are likely closer to being fairly priced or slightly undervalued relative to the competition. But the business is stagnating and the management is still unable to grow the business substantially. Until we see a change in that regard, a change that has shown no evidence of happening thus far, I believe that corporate pricing and poor performance will essentially balance each other out, bringing the company to more or less follow the market. moving forward.

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