Stifel Nicolas picked up coverage of PDM today with a not so flattering “Hold” rating. Piedmont, of course, is the offspring of Wells REIT I, a non traded REIT that went public earlier this year. Stifel said Piedmont was fully valued at its current price ($18.70), but that was the least of their concerns.
According to Stifel, PDM is still suffering from a hangover related to its decade long existence as a non-traded REIT, and it will likely suffer from that hangover for some time. Despite moderate leverage and “generally” forthcoming management, Stifel struggles with PDM’s ability to cover its dividend. At the current rate of $1.26/share, Stifel says the dividend is “unlikely to be supported” by either 2011 or 2012 FFO and FAD. If you’ve been following the astounding news being notched by non-traded REITs recently (I have chronicled one of the most head scratching examples here and here), this won’t come as any surprise.
Referring to management’s focus during its years as a non-traded REIT, Stifel says Piedmont needs to transition from a “capital raising entity” to an operating company with a rational geographic focus that can build “solid local operating teams with an ability to see every deal and add value at the submarket and property level. This will take years.” (As if twelve years were not already enough.)
Stifel also took at well-aimed but gentle poke at the non-traded REIT internalization model that created Piedmont, noting that shareholders paid founder Leo Wells $174 million to relinquish a management contract that was cancellable upon 30 days notice. Of course, this did nothing for the overall economics, and Wells REIT I shareholders would have been much better off if they had just invested in an index fund (Stifel calculated that as of the Wells REIT I closing in 1Q04, investors had received an 18.3% return for the theoretical six year hold, versus a 46.5% gain for the Morgan Stanley REIT index and a 19.7% return for the S&P 500 during the same period.
Green Street Advisors is even less generous. In a report produced on the eve of PDM’s IPO, Green Street noted that Piedmont had raised $5.8 billion in gross equity from 118,000 retail investors. At the IPO price of $18/share, Green Street estimated that PDM’s blended annual total returns since 2002-2003 would have only been about 2%. This is far below the 6% return generated by both the Morgan Stanley REIT index and the office REIT sector. Green Street Advisors blamed an “appalling sales load” and “conflicts of interest” for the below average performance.
I spoke with a hedge fund manager specializing in REITs about today’s Stifel report, and he confirmed that Piedmont “will get little respect from anybody for a while to come.” Piedmont does have a good collection of quality assets, but that’s a bit like saying the Wermacht had a nice collection of impressionist paintings in 1943. Amazingly enough, after twelve years and one long-awaited IPO, this REIT is still not ripe.
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You need to check your facts a little more carefully REITWrecks. Wells REIT I sold its first share in 1998, which would make it 12 years old, not 20.
gman – you are correct! Thank you. 20 is now 12.
I think Leo Wells’ internalization value of $174 million was in shares, not cash, and was based on the par value at the time of internalization of $8.38 share price (net of a return of capital to shareholders from an earlier portfolio sale that lowered the par value from the original $10 per share). If you triple this based on the pre-listing reverse split, you get an adjusted par value of $25.14. With the Piedmont stock at 18.71, this is a 25.5% discount, so isn’t Leo Wells payment now worth about $130 million? I think his stock is restricted for at least a year after the PDM listing, so in a kind of perverse sense his interests are aligned with investors. I am sure Wells is getting dividends on his holding, which I estimate at 20.7 million shares, and with a $.31 per share dividend is $6.4 million per year, which is a big number as he waits for liquidity.
Great commentary. In fact, as you correctly point out, the $174 million was in shares, not cash, and Leo didn’t take all of the shares for himself – some of his employees got a piece of the cake too.
Aside from that, he’s indefensible. I have zero sympathy over his $170 million windfall turning into a $130 million windfall. Shareholders paid for it, and it amounts to another 3% load – on top of the 16% upfront load they paid in the beginning. In return, shareholders got a 2% return on their investment. In my experience (with all due respect), most managers would be fired over results like this.