E Why Office Properties Income Trust Is A Deep Value Stock

Growth prospects

Due to the sales of some of its assets and the continuing effect of the pandemic on its business, OPI is likely to incur a 13% decrease in its funds from operations per share this year. In addition, there are some concerns that the pandemic may impart a permanent hit to the business of the REIT, as the “work from home” model may become permanent to some extent. However, it is too early to draw such a conclusion. In fact, most companies are likely to return to their traditional work model when the pandemic subsides.

Moreover, thanks to the massive vaccination program underway, the pandemic is likely to subside at the second half of this year. Such a development will greatly benefit OPI, as it will help the economy recover from its recession and will lead most employees back to their offices. It is also worth noting that OPI will not face the headwind from its asset sales in the upcoming years, as its asset sale program is likely to be completed this year. Overall, we expect OPI to grow its funds from operations per share at a 3.0% average annual rate over the next five years.

Valuation – Expected Return

OPI is currently trading at a forward price-to-FFO ratio of 5.5, which is much lower than the 10-year average of 8.7 of the stock. The exceptionally cheap valuation has resulted from the high debt load of the REIT and the decrease of its funds from operations in 2020, as investors require a discount to purchase non-growth stocks.

However, it is critical to realize that this year will probably mark an inflection point for OPI. The pandemic is likely to subside later this year while the asset sale program will be completed. As a result, the REIT will begin to recover next year and hence it is reasonable to expect its valuation to revert to its historical level in the upcoming years.

If OPI trades at its historical average price-to-FFO ratio of 8.7 in five years, it will enjoy a 9.6% annualized boost in its returns thanks to the expansion of its valuation level. In other words, when OPI recovers, its stock will enjoy a strong tailwind thanks to the normalization of its valuation level.

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William K. 2 months ago Member's comment

Thanks for the rather detailed analysis and an explanation of why this stock is so promising now.