PCH - PotlatchDeltic: Tracking The Investment Cycle Invest Now

2023-04-06 03:04:42 ET

Summary

• The PotlatchDeltic Corporation is a REIT operating in around seven states.
• The REIT industry is very cyclical, and in this article, I will evaluate this cycle and why I believe PCH is a good investment at the current cycle stage.
• PCH stock represents an intriguing chance right now so that investors can take full advantage of the upswing; I recommend buying shares of this company.

Investment Thesis

The PotlatchDeltic Corporation ( PCH ) is a REIT operating in around seven states. Timberlands, Wood Products, and Real Estate are the three segments that make up the company. The REIT industry is very cyclical, and in this article, I will evaluate this cycle and why I believe PCH is a good investment at the current cycle stage.

According to my analysis of the investment cycle, we are currently in the recovery phase, making this an excellent moment to purchase PCH stock. Due to its solid foundation, which I expect to grow even stronger during the investment cycle's recovery phase, I think PCH is a good option. I am optimistic because I believe the company's Return On Equity trend, decent cash flows, strong balance sheet, and commitment to shareholders through share buybacks and dividend payments will improve as the industry recovers during this cycle.

Since the recovery phase occurs at the beginning of the cycle, I believe now is the best time to buy in so that you can profit from the expansion phase and the cheap entry price.

The Real Estate Cycle

Investors and developers alike must have a firm grasp of the real estate cycle, a cyclical process comprised of four phases with their unique characteristics. If you have a firm grip on the mechanics of the real estate cycle, you'll be in a much better position to evaluate business prospects and make calculated moves. I will examine the four phases of the real estate cycle and provide a detailed overview of what each involves.

Phase 1: Recovery

First in the real estate cycle is the recovery period. After a crisis, when occupancy rates rise above their low-level downtrend and foreclosure rates start to decrease, a recovery can be said to have begun. In this stage, the rate of recovery is highly variable; different recovery trends may recover from the downturn at different rates based on a number of factors.

The idea of supply and demand is connected to the recovery process. The recovery phase of the real estate market starts when buyer demand exceeds the available inventory, driving up prices in all markets. Recovery also boosts consumer confidence, which means more people will be willing to make large purchases like purchasing a new house or investing in commercial real estate.

Phase 2: Expansion

The second part of the real estate cycle, expansion, is characterized by positive growth and increased opportunities for property owners. Rising values, leasing rates, and property rents and prices characterize expansion.

Buying or investing in real estate during expansion is a wonderful way to take advantage of rising property prices. As a result of the expansion, the buyer's market of the Pre Expansion period has changed into a seller's market.

Both seasoned and first-time investors can benefit from the real estate market if they research and avoid over-optimistic projections of potential rental income or selling prices.

Phase 3: Hyper Supply

Hyper-supply is a phase of the real estate cycle that many try to prevent. When there is a surplus of available goods and services relative to the local market's needs, a condition known as "hyper supply" occurs, resulting in higher vacancy rates and reduced prices.

Owners who incurred debt buying numerous properties during Hyper Supply may have to dig deeper into their pockets to make debt payments. Real estate professionals often report feeling down during this time because there are fewer transactions and opportunities compared to the Expansion period.

Phase 4: Recession

In the fourth stage of the real estate cycle, known as a recession, house prices fall, inventory rises, buyers have less disposable income, lenders offer less favorable terms, and sales volume drops. The real estate market may enter this period due to cyclical shifts in consumer sentiment, capital market volatility, or economic downturn. Similarly, the real estate market downturn usually follows a time in which home prices rose sharply.

Buyers' access to money and financing has been unprecedented, and stocks have been low. Due to increased inventory levels on the market and decreased borrowing power, buyers have become more selective about when they make real estate purchases during this recession. There will be difficulties during downturns in the real estate market, but as history has shown, there will also be new chances for buyers, sellers, and investors.

When I consider the four phases, I see a sector that has been through a tough patch or recession and is now beginning to recover. The real estate market is set to soar in 2023. The market will likely recover , and there will be many chances for investors. Remember, though, that the real estate market is dynamic and will always present its unique set of challenges.

Why Invest In PCH As The Cycle Starts?

Having reviewed the cycle, I think PCH is a great investment opportunity for the beginning of this cycle. The following are some of the reasons why I think PCH is a great chance;

Financial Health

PCH's strong financial position is among its interesting features. It's $471.5 million in short-term assets exceeds its $139.8 million in short-term liabilities. This suggests the corporation can cover its short-term liabilities by 3.3X, a very comforting and solid starting point for the investing cycle. Additionally, this interesting position is apparent over the long run, with its long-term assets exceeding its liabilities. 2.6X

PCH's debt-to-equity ratio is also 45.6%, which I find extremely satisfying. Over the last five years, the debt-to-equity ratio has decreased from 285.9% to 45.6%. Operating cash flow (47.6% of its total debt) and EBIT adequately cover its interest payments. (15.8x coverage). The company is not in dire straits regarding liquidity because its $343.8M cash and equivalents position can cover its MRQ operating expenses (the highest quarterly expenses since 2020) 1.4X. This, in my opinion, demonstrates how solid this company's operations may be as they move into the following quarter, presuming they never produced any additional cash flows. This liquidity and the debt position sum up this company's healthy financial position.

Commitment To Shareholder

Despite a challenging macroeconomic climate, PCH has been committed to its shareholders through dividend payments and share buybacks. Although the company's dividend distribution has been volatile, its consistency is worth considering.

In contrast to the industry's average growth rate, the company has increased its dividend payment for three years in a run. In addition, unlike the industry average of 8 years, it has given dividends for the past 13 years straight. This dividend strategy is very sustainable, with a dividend payout ratio of about 35.61%. I am optimistic that the volatility problem will be alleviated as the industry moves through the investment cycle and reaches its expansion phase peak. When the business enters the subsequent terminal phase, I expect dividend cuts to follow.

In addition to dividends, the company bought its share back as part of the returning capital to shareholders. In August 2022, PCH announced that its Board of Directors approved a new $200 million share repurchase program . The previous $100 million share repurchase program approved in August 2018 has been canceled and replaced with this one.

Mr. Richards said "Returning cash to our shareholders through opportunistic share repurchases remains an important part of our capital allocation strategy," said Jerry Richards, vice president and chief financial officer. "Today's announcement reflects our Board's confidence in our ability to continue generating robust cash flows, as well as our commitment to growing shareholder value over the long term."

Valuation

Guided by the relative PE metric, PCH is attractive as it appears undervalued compared to its peers.

Compared to its peers, PCH's P/E ratio of 11.6X is significantly lower than the average of 30.8X. Further, with a forward P/E of 53.19X, I believe the industry shows how optimistic it is in this stock which lends credence to my bull thesis backed up by a good investment phase in the cycle.

Conclusion

Using the characteristics of the real estate investment cycle as a guide, I am confident that we have entered the recovery period and that now is the most exciting time to invest in real estate. As a result of these solid underpinnings, PCH represents an intriguing chance right now. So that investors can take full advantage of the upswing, I recommend buying shares of this company.

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