During times of turbulence in the market, one bastion of safety that investors can gravitate toward are REITs. Generally speaking, these tend to be fairly stable prospects from a fundamental perspective. They often offer attractive yields because of the large amounts of cash they pay out relative to their cash flows. And this picture does not often change for the worst when the market suffers. Of course, there are a wide variety of REITs to choose from, with that variety determined by geographic region of emphasis, asset class, and more. One interesting firm that investors have seemed to rely on during these difficult times is Washington Real Estate Investment Trust (NYSE:WRE). Over the past few years, management has worked hard to transform the company from a diversified REIT to a multifamily property owner with a particular emphasis in key markets like Washington, DC, Atlanta, Georgia and select parts of North Carolina. Despite the stability that investors have enjoyed in recent months, shares of the company are starting to look rather pricey. Though I wouldn’t go so far as to say the company warrants a ‘sell’ designation at this time, I do think upside potential is severely limited in the near term and investors can likely find better opportunities elsewhere.
The Transition Is Basically Complete
October 2021, I wrote an article covering Washington Real Estate Investment Trust and I dove into the question of whether it represented an attractive investment opportunity. At that time, I said that shares of the company were expensive. Financial performance in prior years had not been ideal. However, the struggles the company saw were intentionally inflicted as management sold off substantially all of the company’s assets that did not have anything to do with the multifamily space and used those proceeds to acquire multifamily properties and to pay off debt. I said that the picture for the business was starting to show positive signs. But because of the high price that shares were going for, I ultimately rated the company a ‘hold’. Since then, the S&P 500 has decreased in value by 9.8%. But over the same timeframe, investors in Washington Real Estate Investment Trust experienced a loss in value of just 1%.
Fast-forward to today, and Washington Real Estate Investment Trust looks significantly different than it did in my prior article. The company had been working for a while on unloading its office and retail properties in order to complete its transition to a firm focused largely on multifamily assets. This culminated in a rather large sale in 2021 of 3.06 million square feet of office and retail assets for a combined $934.3 million. Today, the company is left with approximately 8,200 apartment homes and just 300,000 square feet of commercial space.
From a fundamental perspective, the picture for the business is showing evidence of improvement. Yes, revenue in 2021 totaled just $169.2 million. That’s down from the $294.1 million reported for 2020. However, results experienced in the first quarter of 2022 have been encouraging. Revenue of $47.8 million beat out the $40.6 million reported just one year earlier. The company benefited in the latest quarter from a rather significant rise in occupancy. Across its total residential portfolio, this was 95.6%. That compares to the 90.7% seen the same quarter one year earlier. For same-store assets, the number increased from 94.3% in the first quarter of 2021 to 95.8% today.
When you dig deeper into the numbers, the picture does become more complicated. Consider, for instance, the FFO, or funds from operations, of the company. This profitability metric totaled $14.5 million in the first quarter of 2022. That compares to the $28.5 million reported one year earlier. However, if you look at the picture through the lens of its core assets, we did see an improvement. Continuing operations FFO came in at $22.2 million. That’s up from the $15.8 million reported one year earlier. Another profitability metric that is worth paying attention to is NOI, or net operating income. For the company’s residential properties, this was $27.4 million in the first quarter of this year. That stacks up favorably to the $22.3 million reported for the first quarter of 2021.
Judging the company based on historical financial results is tricky and not all that reliable because of the changes made in the firm’s portfolio. But we do know that management forecasted core FFO for this year of between $0.87 and $0.93 per share. At the midpoint, this translates to FFO of $78.7 million. This assumes two recent acquisitions, combined with another $100 million spent on acquiring multifamily assets throughout the year. The company also sees same-store multifamily NOI revenue growth of between 7.75% and 9.75%. If we assume that core FFO is indicative of how other financial figures will perform, then we can anticipate operating cash flow of around $78.1 million, NOI of around $94.9 million, and EBITDA of roughly $92.9 million.
Using this data, we can effectively price the company. On a price to operating cash flow basis, Washington Real Estate Investment Trust is trading at a multiple of 26.8. That compares to the 23.4 reading that we get if we use 2021 results. The price to NOI multiple should be 26.6. That stacks up against the 19.3 reading we get if we use 2021 figures. The price to FFO multiple has actually improved, falling from 31.9 if we use last year’s results to 22 this year. But the EV to EBITDA multiple looks set to rise from 23.1 last year to 26.3 this year. As part of my analysis, I decided to compare the company to five similar firms. On a price to operating cash flow basis, these companies ranged from a low of 18.4 to a high of 24.7. Using our 2021 results, we find that two of the five companies were cheaper than our prospect. But using the 2022 estimates, Washington Real Estate Investment Trust becomes the most expensive of the group. Meanwhile, using the EV to EBITDA approach, the range was from 14.6 to 22.9. In both scenarios, our prospect was the most expensive of the group.
|Company||Price / Operating Cash Flow||EV / EBITDA|
|Washington Real Estate Investment Trust||23.4||23.1|
|Equity Residential (EQR)||23.7||14.6|
|AvalonBay Communities (AVB)||24.3||17.1|
|Camden Property Trust (CPT)||24.7||19.6|
|Essex Property Trust (ESS)||18.4||21.1|
Based on the data provided, the management team at Washington Real Estate Investment Trust has done a solid job transforming the company into a multi-family-focused enterprise. However, shares of the business are looking rather pricey at this time. If this were not a REIT, I would almost certainly rate it a ‘sell’ right now. But given the likely stability of the business moving forward, I have decided to rate it, if only barely, a ‘hold’ at this time.