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Select Multifamily REITs Benefit From Higher Interest Rates

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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Not Touching Anything

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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My Hedges Are Failing Me

Per the course, some dipshit(s) is loading up on oil going into the teeth of the summer slowdown, keeping steady pressure on the contracts. Who exactly it is that thinks buying crude oil while inventories are undergoing surprise builds and PMI is missing expectations, I cannot say. All I know is that this is cliché.

The market is rolling over and some genius is trying to strip down my shield and use it for a wake board on a lake somewhere.

The euro is also hitting pressure around that 1.3 area. Look, Europe is inevitably at the heart of this slowdown. Their unemployment and economy issues are what is derailing China. Japan is front and center, but Europe is always lurking in the background.

If we slow down, there is zero chance that the euro can hold this strength.

On the positive side, CLP shook off analyst downgrades and lawyer harassment and rallied more today; mostly because it’s a good deal.

I don’t know what it is about the bar exam that turns people into sociopaths – I don’t want to know. The truth is, I actually hope these law firms piling on fiduciary inquiries succeed in getting MAA to pump up the offer, just to seal the deal. But when it’s all said and done, the lawyers pushing this harassment of CLP’s management should seek professional help.

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Added To CLP

I grabbed more CLP for $23.32. The merger offer is good for at least another 4% of upside, in MAA stock. Of course, the deal is more volatile than, say, the BXG buyout (which was all cash) so maybe I get burned here. But I love the multifamily space and CLP’s apartment communities are golden.

As for whether or not I want to stick around and be a part of the new company, I’ll make that call later as things progress along.

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Jackpot

CLP up more than 5% on the news:

MEMPHIS, Tenn. and BIRMINGHAM, Ala., June 3, 2013 /PRNewswire/ — MAA (MAA) and Colonial Properties Trust (CLP) today announced that they have entered into a definitive merger agreement under which MAA and Colonial Properties Trust will merge, creating a Sunbelt-focused, publicly traded, multifamily REIT with enhanced capabilities to deliver superior value for residents, shareholders and employees. The combined company is expected to have a pro forma equity market capitalization of approximately $5.1 billion and a total market capitalization of $8.6 billion.

I’ll investigate the deal more closely later.

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Fun With Twisters

Excuse the lapse of writing, particularly during such an eventful day as yesterday. A family member realized some damage to their house from the wind storms that struck Wednesday; missing shingles, broken trees, some little things like that…and I said I’d help them out.

Today, I’m rather tired and, since I forgot to apply sunscreen, baked like a manicotti.

My outlook on equities remains cautionary. I have a large cash position and ample shorts with SCO and EUO that give me, I feel, a 50/50 cash/invested stance. My longs are AEC, CLP, CCJ, BAS, RGR and silver.

AEC was hammered yesterday, one of the top losers in the market. They announced another secondary, which they’re using to get their debt lower. AEC executives I believe are very concerned about the ability of interest rates to hold. They have been for over a year now. And not just for interest rates from treasury yields, but also there have been subtle drops of fear about what would happen if a push to reform Freddie and Fannie upended the new loan origination process. So possibly expect more dilution. But, earnings are set to improve from the move, FFO remains strong, and as long as they keep pushing the business towards expanding operations (California is their big push at the moment), I will be willing to stomach some stock sales.

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