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CommonWealth Reit Message Board

  • sfruehling1 sfruehling1 Dec 23, 2010 2:55 PM Flag

    CWH Valuation Ratios

    I own CWH and a little of CWHPRD as a long-term hold. At present, CWH still seems to be under valued (good 2-4 year price/share and dividend growth potential) and CWPRD with a current 7.5% dividend near its fair value (a safe dividend with little price/sh growth potential). I like to look at ReitWatch, a free report put out monthly by NaReit. It makes comparison among Reits relatively easy by listing all the major Reits along with their FFOs and various valuation parameters in a table. I have not seen this source mentioned on this board, so I thought I would bring it up.

    http://returns.reit.com/reitwatch/rw1012.pdf

    Their latest December issue lists 18 office Reits. Disregarding company quality issues, CWH appears to be the most reasonably priced of the 18 Reits. It is has a current dividend yield of 7.99% (Office Reit Av- 3.92%), a Price/FFO multiple for 2010 of 6.72 (Office Reit Av- 14.83), a Debt/EBITDA ratio of 4.6 (Office Reit Av- 7.2), FFO Payout of 54% (Office Reit Av- 54%) and a Price/Book Value of .6 (Office Reit Av- 1.4).

    OK. What about important things such as quality issues? Its external management, RMR (Reit Mgt & Research), no doubt has numerous conflicts of interest that negatively affect CWH’s value. They have, however, put together one of the largest office reits in the nation and appear to me to have managed it at least average or better than the norm during this Great Recession. Is their management fee excessive? CWH’s general & administrative expense was a little less than 5.0% of rental income last quarter. This may be on the upper end for this expense (BDN & BXP had an Adm. Exp. in the 4.0% to 5.0% range), but in my judgment is within reason. Has RMR sold all the good properties and kept their poor properties? They have spun off a lot of their best office properties such as medical and government buildings to their specialized sister reits, SNH (Medical) and GOV (Government). These properties, however, were reportedly sold at market value and the spin-off reits were able to achieve substantially higher price/book ratios than being lumped with CWH (which one would guess was part of the objective of the spin offs). From its 3rd qtr 2010 Supplemental,

    http://www.cwhreit.com/controls/viewdocument.aspx?DocumentKey=226

    CWH has about 66 million sf with roughly ½ consisting mainly of general office (1/3 CBD & 2/3 Suburban), ¼ in industrial buildings, and ¼ in leased commercial/industrial land in Hawaii. Their portfolio without their medical and government buildings is not as strong, but it appears to contain mainly Class A properties that could see a substantial upside (e.g. present total occupancy is 86%) once the national economy recovers.

    I have concerns that RMR may have overpaid for some of CWH’s properties (perhaps, part of reason for their high book value) and is not very investor oriented (e.g. no share buy backs). They are, though, fairly sophisticated and have an incentive not to kill the goose (CWH) that lays their golden eggs. Assuming our economy is on the way to a recovery, CWH looks fairly good to me for a mid to long-term hold. That said, I could easily be wrong. Sam

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    • Sam-

      The problem with cwh is the AFFO-not the ffo. If anything, IMO, cwh has been understating the cost of its capital expenditures by classifying them as building improvements and Thereby is overstating its cash available for distribution. It the SHORT RUN, the increasing vacancy rate improves their AFFO by deferring the cost of tenant improvements. So in the future, increased occupancy results in decreased AFFO which adversely impacts on dividends.

      Unfortunately-the stock market tends to have a short term mkt perspective. Prices track dividends. In terms of the way stock investors seem to think, the upside potential of a large vacancy factor probably comes in at 10th place because it could take 2 or more years to be recognized.

      So if you are willing to take a beating in the short run HOPING that something good will happen with this stock in the long run-then cwh may be for you.

      It may also be good for a vulture like sam zell because he and his people have the expertise to turn cwh around.

      So if you want to think like a long term real estate guy like sam-then cwh is a good buy.

      But if you are a stock investor that thinks in terms of the upside derived from dividends-Aint going to happen for a long time with cwh. In the meantime RMR is churning and raiding the portfolio. Who knows what their long term plans are for cwh.

      • 3 Replies to wcorcoran53
      • WC,

        I have not found any evidence (though, they may be doing it) that CWH is 1) understating their capital expenditures by classifying them as building improvements, 2) not being competitive in TI (tenant improvement) allowances, or 3) skimping on their general building maintenance. We seem to agree doing these things would be short sighted and detrimental in the long term. RMR, I assume, is selfish, but smart, and I would think they would also deem it harmful to their long-term interests to do these things. If the cash for these expenditures was not all available from CWH’s cash flow, they have the ability to readily borrow it at a reasonable rate. Leasing vacant space at a competitive rate with the TI financed, typically increases current cash flow, not decreases it. An example, 1 sf leased at $12/sf/yr NNN with $10/sf TI amortized over 5 years would produce an increase in cash flow of $9/sf +/- after subtracting from base rent any un-reimbursed expenses (Est. $1/sf) and financing costs (Est. $2.25/sf).

        We may have different views on what denotes a reasonable and normalized annual capital expense. In 2009, their TI & Leasing expense was about $45.0 million ($1.63/sf for each year of lease made) and their Building Improvements expense about $15.2 million ($.23/sf of total sf) for a total Capital Expenditure, excluding development & redevelopment expenses, of about $60.2 million ($.90/sf of total sf). For the first 9 months of 2010, their TI & Leasing expense was about $56.0 million ($2.00/sf +/- for each year of lease made) and their Building Improvements expense about $4.6 million ($.07/sf of total sf) for a total Capital Expenditure, excluding development & redevelopment expenses, of about $60.6 million ($.90/sf of total sf). Assuming most of CWH’s properties are Class A and B+ properties in an average condition, these reported capital expenditures raise no red flags for me and appear reasonable.

        We agree AFFO and dividends are more important than FFO. I am estimating an AFFO for CWH in 2010 of about $2.51/sh by taking its analyst estimated FFO of $3.76/sh and subtracting out $1.25/sh for capital expenditures (CWH has approx. 72.5 million diluted shares and a total building sf of 67.0 million). Dividends for 2010 are expected to be about $2.00/share. AFFO should more than cover the dividend. CAD (Cash available for distribution) for the third quarter in 2010 is reported in their Supplemental at $.73/sh. If this quarter is representative, CAD will also cover a $.50/sh per quarter dividend. If for some reason CAD comes in below the dividend, they have the ability to readily borrow.

        MHO. Happy Holiday! Sam

      • Corcoran...agree with most of your posts but you are off base with your last one.
        While it’s true historically most REIT prices track to dividends...and FFO influences price because of potential dividend...the recent/current financial meltdown brought to the attention that once again “debt” is a four letter word. Companies with the best tenants and balance sheets didn’t experience the kind of price decline that the highly leveraged ones did. Companies like AHT & LXP were left scrabbling to survive and their management did a good job handling a bad situation.
        For a few years I have been pushing the CWH-D...as by owning the preferred stock you have aligned your objectives along with RMRs...which is to keep this hummer afloat with safe positive cash flow so they can collect their fees and I can collect my preferred dividend. They will always have a strong balance sheet in order to protect themselves.
        Remember they issued most their common stock around $52 ($13 *4)...and the preferred D has a face of 6.5%. Their current cost of borrowing is so low and because of the cut they made to the dividend not to long ago...I believe the dividend should be safe for years.
        Your statement “So if you are willing to take a beating in the short run HOPING that something good will happen with this stock in the long run-then cwh may be for you.” makes no sense ...for the first time in a long time (except when we were in extreme financial crisis mode) I believe this stock is a good buy FOR THE SHORT RUN...but will always be a poor long term investment due to RMRs objective...and i believe the preferred will always be one of the best buys for preferred stocks...company will never be bought out, strong balance shhet and cash flow.
        Which brings me to your next statement “It may also be good for a vulture like sam zell because he and his people have the expertise to turn cwh around.”
        CWH has too many poison pills and RMR would never let the goose that lays the golden eggs get away.
        So while we know that CWHs problem has always been expenses related to tenant improvement, leasing costs, building improvements, development and redevelopment activities...along with the conflict of interest that RMR brings I still believe the stock is currently undervalued.
        At one time Warren Buffet knew of these problems but still bought into a significant share of the company...of course he only played it for a short run which is unusual for him...but matches my play here...

      • moran3119@sbcglobal.net moran3119 Dec 24, 2010 11:48 AM Flag

        I do not think the problem with CWH is AFFO. Vacancy rates going up for most office REITs. not a lot of office leasing going on. AFFO is a bad measure for office REITs in any event because it is lumpy.

        To me problems with CWH are 1) has its properties spread all over place, most REITs are in just a few cities where it is easier to manage and lease, 2) look over 5 year period, CWH has been a bad performer, what has changed so it will now not be a laggard, 3) while CWH seems to upgrading its properties, it still has some weak sisters while most REITs only have class A and strong B properties, 4) suburban office REITs are all cheap, CWH is just cheapest of cheap. Number 1 makes it harder for investors to figure out, increasing discount verses other office REITs and number 2 plays into fears about CWH's external management.

 

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