First Potomac's Market Cap Falls Below $700M

11 Dupont Circle was one of First Potomac’s last major acquisitions. It bought the iconic property in 2014 for $89 million.

WASHINGTON, DC—First Potomac Realty Trust’s market cap has fallen below $700 million, presumable due to the significant drop in share value it has experienced over the last two years. Last week the REIT filed a Form S-3 with the US Securities and Exchange Commission, a technical filing to automatically update its shelf registration. As part of that filing it included a post-effective amendment stating that it expects that it will no longer be a “well-known seasoned issuer” when its annual report is filed for 2015, per SEC regulations. The SEC created the category of ‘Well-Known Seasoned Investor” in 2005. It defines it as  (1) as of a date within 60 days of determination date, has a worldwide market value of its outstanding voting and non-voting common equity held by non-affiliates of $700 million or more; or (2) as of a date within 60 days of the determination date, has issued in the last three years at least $1 billion aggregate principal amount of non-convertible securities….. First Potomac’s filing duly reflects this language. It expects the “global market value of its outstanding common shares held by non-affiliates to be less than $700 million during the 60-day period preceding the filing date for its Form 10-K annual report for 2015.” As such, the company will no longer be “a well-seasoned issuer….” In short, First Potomac was a small cap REIT that has just become much smaller. A 33% Decline In Stock Value Since 2013 Presumably the reason for its reduced cap is the significant erosion in its stock value, a drop that began in 2013. Since then it has tumbled more than 33%. It was then, in 2013, that First Potomac launched a repositioning of its portfolio, focusing on urban core assets while selling off non-core assets in outlying areas. First Potomac also lost ground in the overall market sell off of REIT stocks last year, due to fears about the Federal Reserve Bank’s expected interest rate increases. Last year also saw the abrupt resignation of First Potomac’s former long-standing CEO Doug Donatelli and CIO Nicholas Smith. A Huge Net Asset Value Discount Some institutional investors lately have been increasing their positions in the REIT, presumably because they like the huge net asset value discount it now offers.  TR Rowe Price’s Small Cap Value fund just took a stake in the REIT, for example. Land and Buildings Cites First Potomac as a “Must Own” Perhaps more tellingly, in Q3 2015, activist fund Land and Building included First Potomac Realty Trust as one of its “must own” real estate stocks, along with American Residential Properties, CBRE Group, Hilton Worldwide, MGM Resorts, and SBA Communications. In July of 2015 it wrote that:

First Potomac trades at among the largest discounts to net asset value in the entire public REIT universe with 50% upside to Land and Buildings’ estimated NAV of approximately $16. A weak Washington DC office market, high leverage and perceived capital allocation missteps have weighed on the stock, with the stock now at a greater than 8% implied cap rate.

It also noted that recent transactions in Washington DC, where First Potomac’s portfolio is focused:

…are well above the implied valuation of the stock suggesting strong investor demand for their properties. Same-store occupancy is strong with leased percent up to 91.8% as the portfolio is of higher quality than we believe investors perceive.

Land and Buildings has been in conversations with First Potomac’s management, it also said. These conversations:

…suggest an improved capital allocation discipline, beginning with the recent authorization of a stock buyback program up to 5 million shares. To further unlock value we would expect to hear from management that they will stop acquiring assets and instead sell assets to facilitate share repurchases and deleveraging, including a pay down of the company’s high cost preferred stock.

Land and Building ended its analysis with:

If after these steps are pursued the shares continue to trade at a steep discount to NAV, we would like to hear from management that they will consider all options to maximize shareholder value, including a sale of the company.

Land & Buildings holds 5.47% of First Potomac Realty’s outstanding share, or 1.19 million shares. 2015 Proceeds to Unfold

First Potomac sold Cedar Hill I and III for $27.3 million to help fund its share repurchase plan.

Perhaps the REIT decided to follow Litt’s advice or perhaps it had independently decided to take this path. It is important to note here, however, that as a major shareholder Land and Buildings would routinely be in conversations with the REIT — any REIT. Either way, much of what was outlined in Land and Buildings’ note has materialized or was in the process of happening as the letter was published. On July 14, 2015, shortly before the Land and Buildings’ Q3 note was published, First Potomac announced its Board of Trustees authorized a 5-million share repurchase program. By December First Potomac Realty Trust announced a handful of asset sales , the proceeds of which it would use to help fund its share repurchase program. By that point in December, Donatelli and Smith had resigned. When the resignations were announced, a First Potomac spokesperson told GlobeSt.com that the Board of Trustees had made a long and thoughtful deliberation before it came to its decisions. “They felt now was the right time for a leadership transition.” Chief Operating Officer Robert Milkovich took on the role of CEO and said his first piece of business would be the execution of the sale of at least $200 million in assets. Next Week’s Earnings and Strategic Plan So what comes next for First Potomac? The market will soon find out. First Potomac plans to issue its earnings release for the fourth quarter, as well as announce details on its new business plan, before the markets open on Feb. 22, 2016. First Potomac was unable to comment for this article as it is in a quiet period before its earnings release next week.