From Washington REIT's (NYSE:WRE) latest conference call, it sounds as though the company enjoyed a fruitful first quarter and has a rosy outlook overall. That's good to hear; I've been watching the company but not buying its shares, because its dividend coverage is a bit lower than I'd like.
For the quarter, the company improved its funds from operations (FFO) by 10% to $0.54 per share, versus last year's $0.49. The company also upped its FFO estimate for all of 2006, from a range of $2.15 to $2.18 per diluted share to $2.17 to $2.20. The increase stems from a rise in occupancy at the company's office properties and from a number of acquisitions it completed earlier than expected. Washington REIT has already closed on $87 million of property acquisitions, and it now expects to acquire more than the $100 million in properties it originally projected for this year.
The strategy the company has pursued for its recent acquisitions has largely focused on medical office buildings. Rather than looking for properties already listed for sale, the company identifies properties it wants, then approaches the existing property owners to ask whether they would be willing to sell. These properties are 100% leased -- though in some cases in need of improvements -- and are in close proximity to other hospitals and medical centers. In addition, medical office tenants tend to be fairly stable in their occupancy.
Like Vornado Realty Trust (NYSE:VNO), Washington REIT is a diversified property manager without a focus on any one sector. Its top tenants include the World Bank, Sun Microsystems (NASDAQ:SUNW), and Sunrise Senior Living (NYSE:SRZ).
I'm impressed with Washington REIT's efforts, but I'm not thrilled with its valuation. Adjusting the company's FFO for capital expenditures, leasing commissions, and tenant improvements, I performed a rough discounted cash flow analysis, using a few different growth scenarios and a discount rate of 9%. With these assumptions, I arrive at a stock that is fairly valued to 10% undervalued. Considering the company currently yields 4.6%, that's not terrible, but I prefer at least a 20% margin of safety before jumping into any equity investment. In cases like this, I'll continue to double-check my assumptions and wait for an attractive opportunity to present itself. And if need be, I'll move on to the next opportunity.
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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
