Thorough and well researched write up! I'm still a little more conservative than your numbers on valuing their office assets but credit where it's due - you were basically spot on the pricing for the Mechanicsburg, PA sale in Q2 out of the "Other" bucket and my valuation estimate was ~40% lower than the price achieved! I hope you're right and I'm wrong - certainly was the case for $NLOP, which you knocked out of the park.
Connecting the dots indicates to me that the Level3 property in the "Other" segment has a short <1 year lease so I'd value that a lot lighter and on a price PSF basis than on a cap rate but doesn't move the needle on overall asset value.
Also of note is in an early presentation, management released fairly detailed tear sheets on each property including the area in acres and Floor Area Ratio (FAR) of each site they own. Due to the suburban nature of the office portfolio, site coverage and FARs tend to be low but locations tend to be pretty good. This supports the ability of alternative use value - as multifamily, mixed use, industrial - to limit downside for those offices that are hard to lease and / or obsolete (despite being broadly new and good quality, there are some real clangers in the portfolio as well).
The office market is far from out of the woods and real question marks remain around demand. However, the supply side of the equation is starting to heal as JLL Q2 research shows ground-breakings of new office projects are drying up and inventory removals continue to accelerate.
Great input, thanks! That's what I like about this situation: you can use figures more conservative than mine and still get a a value well above the trading price. I would not be as enthusiastic at $18-20 but down here, I think it's a steal.
Any concern that the company will tap the $200 mil ATM program it disclosed in Aug'23? It would seem unnecessary given the balance sheet and cash flow but it is there.
Minimal. Having an ATM filed is standard for REITs. On the off chance that shares rocket to something approaching NAV and an equity raise would not be dilutive, they don't want to waste weeks getting offering docs ready and filed and potentially miss the window.
Management knows they need to build credibility with investors, and that selling shares at a 13% cap rate to buy assets at 6-7% cap rates would absolutely blow those efforts to pieces.
With all your conversations with these REITs, how many of them are aware of the offerings of IWG and are considering this option as long term leases expire/roll off?
I think IWG and similar are options for large multi-tenant buildings in dense metro areas. Your 5+ story buildings in central business districts, etc. Less viable for buildings like those that Peakstone has, which are mainly designed for single tenant occupancy and are located in suburban office parks mostly accessible by car.
Dave, Thanks for the great write-up. Would you pass on your opinion regarding the dividend, it's reliability/payout coverage, and any role it may play in protecting the downside potential of the stock price?
I should have discussed the dividend, which is currently 22.5 cents/quarterly for a 6.6% annual yield. The dividend payout is less than one-third of adjusted funds from operations, which is highly sustainable. (In reality, some cash flow will be used to reduce the mortgage balances in the "other segment" and so isn't truly cash flow. But the dividend remains very well covered.) As for downside protection, I do hope the strong yield puts a floor under shares. On the other hand, the dividend hasn't stopped shares from suffering badly over the last 12 months.
Thorough and well researched write up! I'm still a little more conservative than your numbers on valuing their office assets but credit where it's due - you were basically spot on the pricing for the Mechanicsburg, PA sale in Q2 out of the "Other" bucket and my valuation estimate was ~40% lower than the price achieved! I hope you're right and I'm wrong - certainly was the case for $NLOP, which you knocked out of the park.
Connecting the dots indicates to me that the Level3 property in the "Other" segment has a short <1 year lease so I'd value that a lot lighter and on a price PSF basis than on a cap rate but doesn't move the needle on overall asset value.
Also of note is in an early presentation, management released fairly detailed tear sheets on each property including the area in acres and Floor Area Ratio (FAR) of each site they own. Due to the suburban nature of the office portfolio, site coverage and FARs tend to be low but locations tend to be pretty good. This supports the ability of alternative use value - as multifamily, mixed use, industrial - to limit downside for those offices that are hard to lease and / or obsolete (despite being broadly new and good quality, there are some real clangers in the portfolio as well).
The office market is far from out of the woods and real question marks remain around demand. However, the supply side of the equation is starting to heal as JLL Q2 research shows ground-breakings of new office projects are drying up and inventory removals continue to accelerate.
JLL Report: https://www.us.jll.com/content/dam/jll-com/documents/pdf/research/americas/us/jll-us-office-market-dynamics-q2-2024.pdf
Great input, thanks! That's what I like about this situation: you can use figures more conservative than mine and still get a a value well above the trading price. I would not be as enthusiastic at $18-20 but down here, I think it's a steal.
Any concern that the company will tap the $200 mil ATM program it disclosed in Aug'23? It would seem unnecessary given the balance sheet and cash flow but it is there.
Minimal. Having an ATM filed is standard for REITs. On the off chance that shares rocket to something approaching NAV and an equity raise would not be dilutive, they don't want to waste weeks getting offering docs ready and filed and potentially miss the window.
Management knows they need to build credibility with investors, and that selling shares at a 13% cap rate to buy assets at 6-7% cap rates would absolutely blow those efforts to pieces.
With all your conversations with these REITs, how many of them are aware of the offerings of IWG and are considering this option as long term leases expire/roll off?
I think IWG and similar are options for large multi-tenant buildings in dense metro areas. Your 5+ story buildings in central business districts, etc. Less viable for buildings like those that Peakstone has, which are mainly designed for single tenant occupancy and are located in suburban office parks mostly accessible by car.
Dave, Thanks for the great write-up. Would you pass on your opinion regarding the dividend, it's reliability/payout coverage, and any role it may play in protecting the downside potential of the stock price?
I should have discussed the dividend, which is currently 22.5 cents/quarterly for a 6.6% annual yield. The dividend payout is less than one-third of adjusted funds from operations, which is highly sustainable. (In reality, some cash flow will be used to reduce the mortgage balances in the "other segment" and so isn't truly cash flow. But the dividend remains very well covered.) As for downside protection, I do hope the strong yield puts a floor under shares. On the other hand, the dividend hasn't stopped shares from suffering badly over the last 12 months.
what a treat to get this post just after mentioning REITs from your excellent value-stock-geek podcast.
also appreciate your retrospectives on harbor and p10, even though new thoughts always shinier for us huddled masses.
OffTopic : you mentioned magnate bios, check out the book\audiobook of 'Trust' by Hernan Diaz.
it's a romp through an (multi)imagined octopus persona mixed in with tricks of modern-day robber barons. historical fiction with high-level narrative.
https://en.wikipedia.org/wiki/Robber_baron_(industrialist)