AEC reported earnings this evening. The rehash goes something like this:

Net occupancy of their buildings remains very high at 96.6%, down a little from the 97.3% of last quarter, but nothing to fret about.

FFO missed expectations by a penny. The company management also brought down FFO estimates for 2013. But I would have expected that. They had another secondary equal to ~10% of their market cap this quarter. Of course there’s some per share disruption.

Earnings have never been worth talking about with this particular company, because AEC’s strategy has been an asset rollover into younger, more desirable locations that generate lots of depreciation, masks the performance and writes off against the revenues.

Despite the small disappointment in earnings and funds from operation, there’s much to like here still. The market remains in a daze about what is going to come for Associated Estates Realty.

The management has positioned the company expertly. The cash they raised has partially been put to work, purchasing one more property this month, and beginning development at two others in California, not counting a separate joint venture. The remaining cash, together with some credit line deals, have improved the balance sheet at the perfect time; as interest rates have begun to normalize and the cost of borrowing for corporate purposes and mortgages have gotten more expensive.

This should give the company opportunity to put cheap cash to work on better prospects, while simultaneously securing their occupancy by making it more difficult for renters to vacate.

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Welcome, and I hope I find you well.

I’m coming into the afternoon with strong rallying across my portfolio. AEC and CLP are both up over 100 points. CCJ, RGR, and BAS are all pushing 200. The euro cracked this morning, and EUO is now up 150. Silver is enjoying a relief rally, but it’s down so much inside of this year, it seems stupid to talk about.

The only place I’m losing money today are the TSLA puts. And since they’re puts at 2-3% of the account, I really don’t care.

I’m actually looking to add to the Tesla put position, this time targeting the 2015 expiries. A $70 strike price should do nice – maybe as low as $50.

I believe TSLA is the new NFLX; sans the recovery.

All in all, I’m still up over a percent so far, with a 30% cash position to boot. But if I were to be honest, I would say I still expect the summer to end dreadfully.

Have a great day.

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Every now and again, I like to look back over where I’ve been to see what I should have done. Sometimes I find I was exactly right. Sometimes I see the errors (hopefully not relevant). And sometime, much to my frustration, I see I was exactly where I should have been but then decided to wander off just before the party got started.

Utilities more or less sum up those frustrations.

I called the utility move about 2 years ago. My reasoning was essentially that a utility is equivalent to a publicly insured bond (a company with a legal monopoly and appropriate guarantees), and that since these bonds have (had) a nice yield, they would become the de facto target if bonds held low prices. But even if bonds somehow fell, they were good enough value to warrant the buy at the time.

Then I picked through and found my favorite utility – AWK (water).

I bought AWK in the low $20’s, road it up to $30, and then…I just sort of wandered off.

So much money got left on the table. Did I leave the utility play because I thought the move was done? No, I mostly left because I thought we were going to sell off and wanted to trade both ways. So I raised cash.

I cannot tell you how many times I’ve overplayed my hand like this, trying to nail the inflection like an ace. And what I’ve witnessed, in hindsight, is that I’m a much better stock picker than I am a market timer.

Which brings us to oil.

I just sacrificed some more money on the alter of oil. But this time, instead of shorting more like a beast, obsessed with “being right”, I’m taking my drubbings and walking off. I’ve been almost perfectly hedged the past few months (excluding silver, which I treat as almost an off balance sheet position at times). And I refuse to let the SCO “hedge” (read, loser) sink my year, which has been very profitable. EUO is doing well, I have a healthy cash position, and BAS, CCJ, AEC, CLP, and RGR will all prove winners. Of this I am confident. The only other thing is the TSLA puts, which are low single digits of assets and will cause as much fluctuation in my portfolio as the month of June, should they burn out.

Or they make my year.

The message here is flexibility. Learn to have it – don’t waste away your hard labors on the rash emotions of the moment.

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I’ve been sleeping on several issues that impact my two multifamily companies (AEC and CLP).

These issues are the effects of higher interest rates as they determine mortgages, the subsequent demand for rental units, and the ability of the space to borrow money to finance growth.

It’s a pernicious structuring, for sure. No easy answers here; as the effects seem to run counter to one another and can vary immensely depending on who you are and what your positioning is.

However, my general feel for the situation is this:

For the moment, financing for multifamily/REITs is generally secure. Conservatives are salivating to dismantle Fannie and Freddie, and the public probably concurs with those sentiments, but that would strike at the heart of liberal incentives. So any attempt to reform those institutions will probably be shut down or deflected.

However, this financing is set to get more expensive, if bonds keep rising. If you’re a company saddled with debt, this could cause all sorts of trouble. I remember back when I was first perusing through the space for purchases, I saw a lot of multifamily REITs that were knee deep in loans with bad cash flow and not enough on the books. If financing for apartment construction goes up and you’re holding the wrong companies, growth will go out the window and these badly situated players turn into takeover targets for the best of breed.

Meanwhile, there will most likely be shown to have been a small upsurge in housing purchases this last month. Players on the sidelines who became fretful that the window of opportunity was permanently closing likely rushed out to lock in a house purchase. After that surge though, the path to homeownership is getting harder, not easier, with the treasury selloff. This should solidify the 95% occupancy rates these companies have been experiencing, and get any apartment communities they construct filled.

I like AEC and CLP because they have had a vigilance about paying off debt, improving credit ratings, reinvesting into the business, and controlling operations. Their cash positions are well padded, and if push came to shove, they could quickly turn their cash flows on the liabilities, locking the companies down. I’m not worried about either of these two companies getting swept away from higher rates.

AEC just finished their second equity offering, and CLP is busy merging with MAA to make one of the largest multifamily REITs in the country.

Thus, until I see contradictions to these beliefs, I’m inclined to feel that both AEC and CLP will benefit on net from raising interest rates, even though it may momentarily hamper their growth. They are in superior positions relative competitors thanks to smart management decisions. And I am holding firm here.

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Have a quick look at the graph on this site. I haven’t audited any of the numbers, but if the author has done his homework, it fortells fairly clearly what oil longs have to expect.

For the moment, all of my short exposure is being pesteringly resilient; most probably because I am counting on those positions to even out my account. So of course, oil is holding up here, the euro is trying to push higher, and TSLA recovered a $3 move.

There’s no reason for any of those things other than that they hurt Cain Hammond Thaler. The market is trying to harm me, because that is the only consolation anyone in these positions will ultimately have…if they can shake me out.

But I have the patience of sheet rock. You will not win.

Current positions by size (greatest to least)

Cash – 27%
CCJ – 18%
CLP – 8%
AEC – 8%
SCO – 8%
EUO – 8%
Silver – 8%
BAS – 7%
RGR – 7%
January 2014 TSLA 35 Puts – 1-2%

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After AEC announced that secondary offering, the second one in just a short span of time, the stock tanked, and immediately analysts started throwing rotten tomatoes all over their press release. Well excuse me, but I’d say the estimable Jeffrey I. Friedman has once again had the last laugh, ladies and germs.

We in the 9th floor have long had respect for the good Jeffrey I. Friedman and his wisecracking ways. So much so that we have held the stock of his most formidable company consecutively through no less than four separate downturns, always buying more.

Now, with bonds melting down globally, the good Mr. Jeffrey I. Friedman’s decision to blanket his company is excess cash is looking precognitive, if not outright clairvoyant.

The stock has held up. It will sell off as our fellow shareholders, disgraced with horrible positioning, get raked across hot coals by the margin clerks. But the company is positioned beautifully, thanks all to one Mr. Jeffrey I. Friedman.

Never bet against the bitter industry veteran.

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