01/04/22 03:06 PM EST

REITS DAILY BRIEF | 1.4.22 | (PGRE)

Rob Simone, CFA

Ticker: PGRE

Subsector: CBD Office

Headline: Valuation work supporting $12-14/share

As promised we are following up with valuation work supporting upside to $12-14/share from our earlier note yesterday on new Best Idea Long PGRE. Given that in-place NOI is non-stabilized owing to the pandemic and loss of ~$30 million of Barclays NOI last year, in our view an asset-by-asset valuation losses its utility given (1) the near-term uncertainty around the path to recovery in leasing and occupancy and (2) the uncertainty and sheer number of assumptions needed on cap rate and "per pound" valuation metrics against that NOI, in a world of relatively depressed transaction activity and uncertainty around office. In our view it makes more sense to ignore the periodic volatility, instead targeting the long-term stabilized NOI in the out years 7-8 (we estimate ~$460 million) accounting for (1) internal growth, (2) eventual lease-up of both Barclays' and Credit Agricole space at 1301 AoA, and (3) replacing Uber at Market Center in SF. Then discounting that outcome back to the present at a required unlevered rate of return and accounting for frictional/transaction expenses. We have done a SOTP asset-by-asset NAV, but think for now keeping it simple and looking at the company in the aggregate makes more sense and is more informative.

Figure 1: Equity Value / Share Calculation & Sensitivity

Note: Balance sheet items expressed at PGRE's share.

Source: Company Reports, Hedgeye Estimates

Figure 2: Portfolio Underwriting Assumptions

Source: Company Reports, Hedgeye Estimates

Tickers: PGRE, SLG, VNO, BXP, KRC, DEI, ESRT, JBGS, BDN, CUZ, HIW, WE

Subsector: CBD and Suburban Office

Headline: Kastle Systems Back-to-Work Barometer

Office Utilization: Kastle Systems released its weekly office utilization tracker for the 7-day period ending 12/29, which showed a huge -1280bps sequential decline in the 10-city average utilization rate to 17.5%, which is lowest level observed since early-2021 (Figure 1 below). The figures are definitely being impacted seasonally by the holidays, but the degree of drop-off is unquestionably being driven at least in part by Omicron and the related parabolic rise in case counts. As a reminder this metric tracks "bodies through turnstiles," and is different than "occupancy" in the traditional real estate sense which represents tenant leased/occupied space as a percentage of total square feet. All 10 markets showed declines for the week, led by Austin (-2050bps to 23.4%), Houston (-1710bps to 23.3%) and Dallas (-1520bps to 26.2%). New York crashed to replace San Francisco at the bottom of the list. Given (1) the return from the holidays and (2) the recent rolling over of Covid case counts observed in New York and elsewhere, we would expect a return to trend in the coming weeks and a continuation of the gradual upward recovery.

Figure 3: Kastle Back-to-Work Barometer for Week Ending 12/29