Some REITs have been slaughtered by the fallout of the COVID-19 pandemic, and although most have recovered, I have the impression there’s more value to be found in certain REITs that don’t enjoy wide coverage. Columbia Property Trust (CXP) for instance, hasn’t been covered on Seeking Alpha since 2018 so I wanted to have a deeper look into this office-focused REIT.

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The FFO and AFFO remain pretty strong

Columbia Property Trust is an office REIT focusing on San Francisco and the northern portion of the east coast where it owns several buildings that are currently 96% leased.

Source: company presentation

While investments in offices seem to have been avoided since the outbreak of the COVID-19 pandemic, investors tend to forget the office tenants actually are more likely to live up to their commitments than for instance retail tenants (even if the employees of the office tenants are working from home). We clearly see this in the rent collection rate: In both Q2 and Q3, Columbia Property Trust collected 98% of the total rent. That’s indeed not the full 100% but this is probably as good as it gets during these times.

Source: company presentation

Although the rent collection percentages do not have an impact on the FFO and AFFO (rents that have been invoiced but not received and haven’t been written off just continue to accrue as a receivable on the balance sheet). So before I checked up on Columbia’s FFO and AFFO, I needed to make sure the rents that have been billed also were effectively received by the company and aren’t accruing on the balance sheet.

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With 98% of the rent collected, I now feel confident the FFO and AFFO results will provide a reliable overview of how the REIT is performing. Fortunately Columbia does an excellent job in providing all the details one needs and even the company-provided FFO and AFFO calculations are very clear.

Source: Q3 report

As you can see on the image above, the normalized FFO in Q3 came in at $0.42 and this brings the FFO in the first three quartets of the year to $1.21 and Columbia remains on track for a full-year FFO of around $1.60/share. The official guidance calls for a $1.51-1.54 FFO, but I think Columbia Property Trust may surprise us in the positive sense.

The AFFO obviously is lower than the FFO as Columbia needs to deduct the maintenance capex, but nonetheless the AFFO of $38.9M is very strong as this represents an AFFO/share of $0.33.

Source: Q3 report

This means Columbia Property trust is currently trading at just over 9 times its annualized FFO and just over 11 times its AFFO, and that’s not expensive at all for a REIT with strong rent collection rates, a robust balance sheet and some hidden value on the balance sheet.

The balance sheet is strong, and the fair value of the assets appears to exceed the book value

What’s interesting in Columbia’s case is that recent agreements have underpinned the book value of certain assets. One recent example would be the acquisition of a 45% ownership in the 221 Main Street building in San Francisco by German insurance company Allianz. Allianz is paying $180M for its 45% stake which values the property at $400M, which is a massive premium to the $255M book value for the property in the 2019 annual report (page 127).

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Even before this transaction took effect, Columbia’s debt ratio was quite low with a debt to total asset value ratio of just over 35%, comfortably meeting the debt covenants.

Source: Q3 report

I expect the next financial report to show an even lower debt ratio as the transaction with Allianz will add $180M in cash to the balance sheet while losing only $155M in book value. And thanks to a well-thought out financing strategy, Columbia Property Trust only has minimal debt refinancings due in the next few years:

Source: Q3 report

So, no near-term debt maturities are a good thing, and on top of that, Columbia’s lease expiration schedule also appears to be very manageable: Over the next 24 months, less than 15% of the annualized lease revenue is set to expire, and in excess of 66% of the annualized lease revenue expires in 2025 and later. This provides excellent visibility in the next few years, but the REIT’s commercial team will have to start working on lease extensions.

Source: Q3 report

Investment thesis

While I admit I started digging deeper into Columbia Property Trust with some prejudices (as I’m not necessarily a big fan of office REITs), I think this REIT is sufficiently interesting to initiate a long position at the current levels. The quarterly dividend of $0.21 represents a divided yield of 5.8% and represents a payout ratio of less than 70% of the AFFO. Rent collection levels remain strong and with just minimal amounts of debt due to be refinanced in the next two years, Columbia can focus on extending the leases that will be up for renewal in 2021 and 2022.

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The deal with Allianz confirms the fair value of the assets is substantially higher than the book value of the assets. But even if we would just use the “official” book value of $2.53B, the book value per share of Columbia Property Trust is north of $20 and I don’t think this is an unrealistic assumption.

I don’t have a position in Columbia Property Trust yet, but I will likely buy a first tranche soon.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CXP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.