First Potomac Needs Strong Signal of Growth

Over the past few weeks, First Potomac Realty Trust has been one of the REIT stocks that have experienced a drop greater than 10%, joining a group that includes the lodging sector and ‘anomalies' such as NorthStar Realty Finance and the Ashford REITs. In fact, Potomac, an office REIT focused on the Washington DC area, has been found to feature great dividend yield, and growing net operating income and FFO per share. The FFO multiple is currently below the sector average therefore the question is, is it worth pursuing it?

From its 52 week high, the stock price has been down 29% and this year, the share price has dropped by approximately 18%, which is more than majority of REITs indices and its office peers. For instance, the Vanguard REIT ETF dropped by 4% this year.

Potomac opportunity lies in the reason that their portfolio has been repositioned over the years. This has resulted in the company becoming leaner therefore decreasing the square footage from 13 million in 2010 to the current 8 million. This has also increased the average lease rate from $9 to $17 per square foot. Also, Potomac's occupancy has increased while Washington DC region office occupancy has decreased.

Potomac continues its repositioning. Out of their total capitalization of $1.6 billion, they will be disposing of $200 million in assets as part of a plan to get rid of the non-strategic assets. Also, last November, additional changes were made in relation to replacing the management. The founders have retired from executive functions, providing the company with fresh enthusiasm which will take it to great heights.

Therefore, what's missing?

Currently, the organization is not sending a clear direction to where it's headed. Is it shrinking or resuming growth? After the sale of the first properties which are associated with the $200 million disposition plan, the company will be using the proceeds to retire its preferred dividends. Recent history of shrinkage and new leadership puts a question mark on growth plans.

Sentiment towards the office sector has been weak, but in some places like Washington DC area, office-occupying jobs have increased. From an investor's standpoint, weak sentiment is helpful especially when finding good opportunities.

Due to lack of growth, the company has not been able to increase its dividends since 2008. In fact, it's been normal to find office REIT stocks which have not increased their dividends over the past few years.

In reality, the company has reduced its dividends from $1.36 to $0.60 a share for the period 2008 to 2013. From then, the dividend rate has been flat despite the 60% FFO payout ratio. The company has wanted to keep a cushion for the changes it has promoted.

In conclusion, although it is possible to make a quick buck on Potomac for being undervalued, I have not yet been able to see a strong commitment to promote the company's growth.

Source: First Potomac Realty TrustFPO, Vanguard REIT ETFVNQ, Fast Graphs.

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