Wednesday, December 29, 2010

Deal of The Year
My deal of the year is the successful listing of the Piedmont Office Realty Trust (PDM).  The former non-traded REIT listed its shares on the NYSE in February around $15 per share, and it's now trading over $20.  While the stock has risen by about a third since its listing, it is still priced about 20% below its break even level of just over $25 per share.  To exisitng investors, PDM is yielding 5% and at today's price is yielding 6.2% - all covered by operating cash flow.  I buy the argument that if an investor bought shares in PDM ten years ago the overall annual return is pathetic.  But that is not why it's my deal of the year.  The stock not only held its value, but increased in value while successfully accessing the capital markets, positioning itself for long-term growth, all the while achieving its objective of giving investors liquidity.

If there is a black cloud around this deal it is its successful listing and the deferred release of shares, which helped maintain PDM's value through lack of sell pressure, and how I expect this will become the listing strategy for other non-traded REITs.  Baring any bad news over the next month, investors in PDM should have full liquidity of all their shares at prices much higher than the initial listing price.  You can bet that other REIT sponsors watched this smooth transition and will plan to replicate the deferred share release structure.  One non-traded REIT, Healthcare Trust of America, has filed initial documents to list its shares and will also offer staged liquidity, but over eighteen months rather than the twelve months of PDM.  Healthcare Trust of America won't be the last sponsor to exploit PDM's success.

Advantages that PDM had, which other REITs likely won't be able to replicate, are that it had low debt (around 20% near the time of listing), a diversified portfolio of office properites acquired before the spike in real estate prices, and a dividend that was covered by operating cash flow.  The large, stable portfolio offered no downside surprises during the twelve-month deferred listing period, or prompted sell pressure as the tranches were opened to the market.   That PDM is still trading below its break even, even with all those positives, should give non-traded REITs sponsors and the firms that sell them something to think about.  But in the meantime, investors and broker / dealers should thank PDM's management, including the often maligned Leo Wells, for the successful PDM listing.

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