February 8, 2021 BARRON’S 9
STREETWISE
Peloton will spend $100 million on expedited
machine shipments, which will cut into nascent
profits.That sounds like a high-class problem.
Back to the Office?
Warehouse REITs
ArethePlacetoBe.
B
ig-city office buildings
remain mostly empty,
but vaccinations are
on the way. Should
investors buy shares
of office landlords
now, while their
prices remain depressed and their
dividend yields plump?
Better to favor what is already
working in real estate investment
trusts, or REITs, says Brent Dilts, an
analyst with UBS. That means ware-
house owners. Their dividend yields
won’t impress, but they are riding an
e-commerce boom that is likely to
drive future rents higher.
One challenge for office landlords
is that managers are growing happier
with the performance of their remote
workers. In a recent independent sur-
vey of more than 1,000 hiring manag-
ers commissioned by Upwork, a jobs
service for freelancers, 68% said
things were going better than they
were earlier in the pandemic, versus
just 5% who said things were getting
worse.
Asked about plans for staffing five
years from now, managers, on average,
said 37.5% of workers would be fully
or partly remote. That’s down from
56.8% today, but up from 21.2% before
the pandemic.
Not to worry, office bulls say. Com-
panies will want more space for each
worker, reversing years of densifica-
tion, which will help to offset declines
in the number of office workers. But
the problem with that thesis, Dilts
says, is that the vaccines have proven
far more effective than initially ex-
pected, which could cut into demand
for de-squishing.
All told, he predicts an 8% decline
in office-space demand versus before
the pandemic.
Any back-to-work scenario would
compare well with now. Office build-
ings across 10 major cities are just
24% filled with workers, reckons Kas-
tle Systems, a security company. In
New York, the figure is 14%, and in
San Francisco, just 12%.
If occupancy rebounds to some-
thing below prepandemic levels, it
might take years to be fully reflected
in market rents. For example,Boston
Properties(ticker: BXP), the biggest
U.S. office REIT, has an average
weighted lease term of over 11 years. It
traded recently at $92, down from
over $140 a year ago, but up from the
mid-$70s before effective vaccines
were announced. The dividend yield
is 4.3%.Vornado Realty Trust
(VNO), the No. 2 office REIT, pays
even more: 5.7%.
Dilts covers Boston Properties, and
expects shareholders over the next
year to be rewarded with their divi-
dends, and not much else. He rates the
shares at Neutral.
Among his top REIT picks for 2021
are industrial playersPrologis(PLD)
andDuke Realty(DRE), both of
which trade higher than before the
pandemic. Prologis yields a meager
2.2%, and Duke 2.5%, but Dilts sees
further share-price upside of 25% and
13%, respectively.
Both companies specialize in ware-
houses and distribution facilities,
Duke in the U.S., and Prologis world-
wide. Covid-19 hurt store traffic last
year, but overall spending rose, as
online shopping more than made up
the difference.
E-commerce requires roughly three
times as much warehouse space as
store-based retail. Sellers and manu-
facturers are also eager to build inven-
tories, following supply disruptions
from the pandemic and a trade war
with China. That means warehouse
demand is likely to outstrip new sup-
ply in the years ahead, pushing rents
well higher. Already, Dilts estimates,
market rents are 14% to 18% higher
than ones embedded in contracts for
Prologis and Duke.
P
eloton Interactive(PTON),
the seller of big-screen exer-
cise bikes and virtual classes,
said Thursday evening that its
number of paying subscribers more
than doubled over the past year, to 1.
million, counting just those who use
its machines, plus another 625,000 if
users who pay a lower price for just its
app are included.
That sounds like excellent news,
but the stock skidded 8% on Friday.
The company will spend $100 mil-
lion over the next six months on ex-
pedited machine shipments, which
will cut into nascent profits. That
sounds like a high-class problem. So
why the selloff?
BMO Capital Markets analyst Sim-
eon Siegel, who is bearish on the
stock, points out that Peloton beat
revenue estimates, but only by 2%.
And he says that the magnitude of its
upside surprises has been steadily
declining, while management’s guid-
ance was barely above estimates.
“Now a beat is a beat, and PTON is
clearly posting strong results,” Siegel
wrote in a Friday note to investors.
“However, given where shares trade,
as guides and/or beats slow, we worry
[the] share price will follow.”
Siegel notes that Peloton, some-
times called theNetflix(NFLX) of
connected fitness, had recently traded
at 22% of the stock market value of the
streaming giant, but has only about
1% of its subscriber base.
There is another, perhaps less im-
mediate threat. I spoke recently with
Scott Watterson, co-founder and chief
executive of privately held ICON
Health & Fitness, which makes fitness
machines under brands like Nordic-
Track and Proform. It has a software
platform called iFit, which allows us-
ers to participate in live training or
simulate runs and rides in exotic lo-
cales worldwide.
Watterson told me that iFit is up to
five million members, a million of
whom pay subscription fees. That
suggests that paying subscribers may
have tripled in a year and a half. Wat-
terson says customers today shop as
much for fitness software platforms as
for the machines. Part of ICON’s pitch
is that with a single fee, users can con-
nect to its treadmills, bikes, rowers,
ellipticals, and strength trainers.
The connected-fitness boom and
Peloton’s lofty stock valuation would
seem to invite ICON to pursue an ini-
tial public offering soon. Watterson
had no comment on that.
If ICON does go public, Peloton
could find itself jostling not just for
fitness subscribers, but also to hold
onto its share of the affection of
growth investors.B
email: [email protected]
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