New York REIT, Inc. (NYSE:NYRT) and First Potomac Realty Trust (NYSE:FPO) are the two most active stocks in the REIT – Office industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. New York REIT, Inc. (NYRT) has an EBITDA margin of 27.11%, compared to an EBITDA margin of 84.81% for First Potomac Realty Trust (FPO). This suggests that FPO underlying business is more profitable. NYRT’s ROI is -2.60% while FPO has a ROI of 1.80%. The interpretation is that FPO’s business generates a higher return on investment than NYRT’s.
Cash is king when it comes to investing. NYRT’s free cash flow (“FCF”) per share for the trailing twelve months was -0.08. Comparatively, FPO’s free cash flow per share was +0.15. On a percent-of-sales basis, NYRT’s free cash flow was -0.01% while FPO converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, FPO is able to generate more free cash flow for investors.
NYRT trades at a forward P/B of 1.48, and a P/S of 8.83, compared to a forward P/B of 1.38, and a P/S of 4.29 for FPO. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. NYRT is currently priced at a -16.7% to its one-year price target of $9.94. Comparatively, FPO is -1.42% relative to its price target of $11.29. This suggests that NYRT is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for NYRT and 3.30 for FPO, which implies that analysts are more bullish on the outlook for FPO.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. NYRT has a beta of 0.78 and FPO’s beta is 0.79. NYRT’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. NYRT has a short ratio of 2.15 compared to a short interest of 1.45 for FPO. This implies that the market is currently less bearish on the outlook for FPO.
First Potomac Realty Trust (NYSE:FPO) beats New York REIT, Inc. (NYSE:NYRT) on a total of 7 of the 10 factors compared between the two stocks. FPO , generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, FPO is the cheaper of the two stocks on book value and sales basis, Finally, FPO has better sentiment signals based on short interest.