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Joined Sep 2, 2009
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Naturally AEC Gets Disemboweled On Earnings Miss

If you’ve been following my mutifamily trade for any length of time, you already know that analysts absolutely “hate, hate, hate” this stock. They do not respect one Mr. Jeffrey I. Friedman, and work tirelessly to dethrone him.

AEC had a small miss on earnings and came in under expected revenue. For this, the company has been impaled by 3%, and the entire REIT space appears to be selling off hard.

I find the revenue, earnings, and FFO concerns to be dismissible for the moment at least. How many of these analysts were paying attention to the FFO blowout to begin with? Look at a long term chart of FFO growth in the multifamily space and then understand that what people are afraid of amounts to a zit on a rhino’s butt cheek.

It makes perfect sense that at this exact moment in time, it would have been hard for multifamily real estate to continue the 5% revenue growth the sector had been enjoying. Recall that FFO for AEC is up 30% for the first 6 months year over year between 2013 and 2012. That is gargantuan, and until now that cash flow has been directed continuously into reinvestment in the business.

Management at both AEC and CLP (and I presume other equally reputably managed multifamily REITs) took a very well announced break in the pace of acquisitions beginning sometime last year. They found that multifamily units had stopped selling at the rock bottom prices and became concerned about conditions that may impair access to financing. In short, they did what management is supposed to do; they applied the brakes, and got down to the business of actually using their brains and planning ahead.

The last 6 months has seen these companies redirect their cash flow away from reinvestment and into early debt extinguishment and balance sheet improvement. Both AEC and CLP have seen their credit scores upgraded inside of the last year. Once the easy money from financing activities is taken off the table, we’ll likely see a resumption of that high paced revenue growth we saw before.

As demand for rentals remains strong, and the market seems to be easily absorbing rates increasing (recent rates have been increasing at an annual rate of 3.2%), we may see a resumed push into asset acquisitions. AEC announced another purchase this month just before filing. If prices are not good enough or desirable locations can’t be found, then land development will take off.

If demand for new apartments starts to slacken or the company feels that new assets would not serve the network of apartment communities advantageously, then the bounty of FFO that has been built up over the last three years will be focused into a dividend yield hike that showers patient shareholders with cash.

The very large body of free cash flow from operations that has been painstakingly assembled here provides shareholders with a bounty of options. What confuses me, with AEC, is that their FFO is no less desirable, yet priced at a discount to the rest of the sector.

Consider CLP – I was buying them at $17-18 a share, at the same time I was buying AEC for $14-15. For all purposes, they are the same company. I have watched as AEC and CLP mirror each other’s moves practically perfectly; acquiring properties at the same time, paying off debt at the same time, sitting on their hands at the same time, engaging in strategic sales and expense reduction at the same time.

They are nearly identical in every aspect, yet over the last two and a half years, CLP has run to $25 a share, whereas AEC has been squashed repeatedly in its attempts to rally, today trading for $16.

At this discount, I am left to assume that AEC is a prime takeover target. CLP was recently merged into MAA. The sector is primed for some consolidation, with all this money sloshing around. Maybe AEC can get bought out too. I must trust that the great Mr. Jeffrey I. Friedman will do what is in the best interest of us shareholders. He has faithfully adhered to that standard so far.

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  1. TheOSU

    If you would have ever partnered with Friedman (limited partner with him in private equity )I doubt that you would
    have anything good to say regarding
    him .

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    • Mr. Cain Thaler
      Mr. Cain Thaler

      Him personally or the partnerships AEC created and later dismantled?

      Because I’m glad those partnerships are gone; I was cheering and buying the whole time.

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