And Associated Estates Realty, my little diamond in the rough, has once again raised its dividend following an absolutely wonderful quarter. The move represents a 5.6% increase in payout, bringing the annual yield back up to around 5% from the days’ open.

The stock is up 2% on the announcement, but that’s no consolation.

AEC has been crushed over the last 6 months as trolling analysts and crack addicted gamblers were pissed off that the company decided it was better to control their debt than make failed bids at grand slams and gluttonous attempts at devouring the entire apartment market on nothing but a smile and a signature.

By doing things their more conservative way, not only have profit margins continued to improve, but the company’s operations have become more consolidated, lower cost, containing higher value properties, and lower influence from interest rate swings.

And, because they decided to tender their debt load, they’ve been catching ratings upgrades, which will only serve to save the shareholder more in earnings down the road.

Recently, a series of articles have come out suggesting the Multifamily REIT boom is over, because the resurge in housing prices is foretelling a collapse in occupancy and rates. A second, alternate version of this storyline suggests that because a house could, theoretically, cost less than renting an apartment, we would see a huge shift away from rental occupancy and downward pressure on rates.

Sorry, but no, that’s not how attaining mortgages works.

I continue to forecast strong outperformance from the REIT multifamily sector. And, when the market finally catches on, these stocks will have a long way to go before they’re pricing that in properly.

In the meanwhile, AEC and CLP continue to see FFO bulging. And since that’s money going straight to my pocket, I guess I’ll just have to enjoy these dividend hikes while I wait.

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Well, I was wrong about the market running higher. The futures ramped and I got excited. It’s part of the Perma-bull lifestyle.

You do some tummy crunches in the morning, then down ground up liquid lawn clippings, and finish it off with a cardio workout involving mostly mocking Keith while listening to Bob Pisani-on-tape.

(one, two, one, two, one, two…)

I jest…

But in all seriousness, I don’t really care that I was wrong. AEC and CLP are making a move higher right now, and the multifamily theme is strong.

The naysayers from this summer, predicting imminent reversal of rental occupancy and ceiling for rents have been left holding their persons, naked in the middle of the road. Higher house prices have not diminished multifamily in the slightest, most probably because those house prices aren’t exciting a huge push for real estate by renters.

Let the houses on the market trade up 2X. I don’t care. As long as AEC and CLP stay 95% occupied with a nice 4% trend in rents, I don’t give a shit what housing does.

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CLP followed its’ brother, AEC, in reporting earnings this morning before the bell. The theme is the same.

Earnings look bad, cash available to shareholders continues to swell, and FFO blows out.

AEC’s management is scared at the moment, most likely of Fannie or Freddie getting raided by the GOP in a Romney victory, which I can see from them raising a few hundo-million and bunkering down in the third quarter.

CLP doesn’t seem to care.

They’ve continue cycling their operation throughout the third quarter, completing more purchases and sales to bring their costs down while taking advantage of struggling competitors. This multi-billion dollar business (much larger than AEC), at the moment is enjoying a 96.7% occupancy rate.

Rents are rising at a 6% clip this year, uninterrupted. And looking at the state of affairs for Americans, I don’t think that’s changing. I have placed my bets on a major shift in sentiment of US citizens away from home ownership and to renting. Two years in, all data coming from multifamily properties continues to validate this. Even a surge in housing prices, I do not feel, will significantly alter the occupancy rates of quality multifamily apartment REITs.

>90% booked is here to stay, in my opinion.

Here’s my favorite highlight, from their earnings release today:

Development Activity

During the quarter, the company completed construction of Colonial Grand at Hampton Preserve, a $52.2 million multifamily development with 486 units in Tampa, Florida. As of September 30, 2012, the property was 93.8 percent occupied.

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The housing market was supported starting in 2008, when the Treasury Secretary Henry Paulson intervened with, amongst other things, a rescue package for Freddie Mac and Fannie Mae. This is fairly common knowledge.

What you may have forgotten is that the exact terms of the Treasury intervening amounted to a blank check on all losses incurred by the two institutions. Well, sort of…

The precise terms were that the Treasury would take on all losses incurred by the two institutions over cash flow for a period of 4 years. That bailout is set to end with 2012.

Which brings me to a quandary.

I don’t believe that these two institutions have been resolutely fixed yet; what is the likelihood that Fannie and Freddie can operate as independent organizations? More importantly, what happens if they require further government support?

In the 90’s, Fannie and Freddie accounted for over half of all new mortgages being generated. This irritated conservatives to no end, who you will recall launched an effort to reform the two institutions that was ultimately shot down by liberals who liked the social reforms they were bringing to the poor. Since they only suspected that the situation was unstable and would bring turmoil, the Republicans ultimately had to back down from their drive to reform the quasi-private entities.

Today, the situation is very different…

Now, Fannie and Freddie account for ALL new mortgages. We know that they are unstable and are losing money left and right. And Republicans are flat out pissed.

And here’s where the issue for me lies. You see, I own two multifamily REITs which have sort of, kind of admitted that they get all their financing needs either directly or indirectly through Fannie and Freddie. The consequences of a failure of either of these firms is unacceptable. The Real-Estate lobby is in high gear right now, pushing as hard as they can to save these institutions from conservative zealotry.

And I don’t know how this will end.

If the government support of Fannie and Freddie are set to end with 2012, then any future support would require a vote of Congress. When that vote hits the House, it’s a complete toss-up.

Part of me would like to believe that conservatives in the chamber will ultimately behave rationally. But right now, House conservatives, especially those that originated from the Tea Party, have so much egg on their face that I don’t know if they can see clearly.

Remember that these guys were voted in on a wave of anger and charged with one task: undo the (then) last 2 years. They set out to accomplish this goal from the most fortified of positions – all they needed to do was nothing and they would have had ultimate negotiating privilege. And in the end, with all of these advantages…they accomplished nothing.

They were tricked by their peers to surrender a 60/40 majority and concrete demands in exchange for a 50/50 split on a committee that ultimately dropped all of their recommendations. And they gave up veto ability by preapproving anything the committee came up with.

It was in that instant I realized these congressmen were nothing but Freshmen, with no chance of victory.

The problem was, I think so did they. When they realized how they’d been played like school children, they had to have been embarrassed.

And now, a year after the debt ceiling, I don’t think they’ll be as willing to negotiate. They’ve already been shafted once, left holding the bag looking like idiots. Will they fall for it twice? Our failures have a habit of hard lining us into unwavering positions. If Fannie and Freddie come up, I could see the House putting an elbow into the GSE’s throats, just to make a point.

In that outcome, I can say without hesitation, the entire housing market would relapse.

In my portfolio, CLP and AEC would crater. CLP, the better performing of the two, would be in bankruptcy inside of two years and financing dried up. Ironically, the weaker of the two names, right now, AEC, would probably emerge a victor (after the initial 50% losses) – the reason they’re hated so much is because they raised $100 million in cash (about 10% of their total assets). That’s enough money to keep the company running for 2 ½ years uninterrupted.

AEC’s CEO Jeff Friedman is such a shrewd SOB – I love it. I’d put money with him nine days out of ten. The guy didn’t just live through the Savings & Loan crisis; he was in charge during it. He remembers what it looks like when the US government wakes up one day and decides to sink an entire industry. He’s not going to get caught on the receiving end of that just because some punk 30-year-old analyst who was sitting in Trigonometry 15 years ago decides he thinks he knows how to run a business better than a veteran.

The guy has a mound of cash at his disposal, and judging how, after saying that money was for acquisitions and debt extermination, he hasn’t used a drop of it, I’m going to guess what they’re really afraid of is a credit shock.

So, as of right now, I would say that, rather than that silly cliff everyone’s talking about, this is the biggest issue in 2012. If Fannie and Freddie get sidelined by a hardline conservative coalition in the House, all stability in the housing market so far will be for nothing as it goes back into meltdown. And this time, the sole bright spot in real-estate, multifamily rentals and demand, will not escape the shock.

I’m putting my money that it doesn’t happen – it’s just too extreme. But the question comes down to this:

Do you think Republicans are concerned citizens trying to steer the course of government for the better? Or, do you think they’re out of their God-damned minds?

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I’ll start with SKUL. I’m thinking of picking a trade here – it’s a company that sells headphones going into the holiday season, and they have a 60% short / float. I’m sure the company is garbage, but I like the idea of a short squeeze.

I’ll end with rentals – I’ve been reading a steady stream of content trying to argue that the rental boom is done. The reasoning here is that a monthly mortgage payment is now about as expensive or in some cases less than monthly rents, in certain areas.

The articles have concluded that this pricing will lead to incentives to take up homeownership over “wasteful” renting – culminating in reduced occupancies and perhaps downward rent pressure.

It’s actually a pretty convincing thesis. I do think, however, they are glossing over one teensy, tiny, little detail…

Where are these people getting mortgages?

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CLP reported numbers yesterday. I was busy, so I had to wait until today to look at them.

Low and freaking surprises, but they absolutely crushed it. It was AEC part II. Just like AEC, they did so well they had to book a gain, even after massive depreciation.

Revenues were up 12%. Half of that comes from expansion; the other half was just their current operation breaking out – occupancies and rents are high, and going higher. And the company will continue to expand at a 5%+ clip on acquisition alone.

You must embrace the renting nation, for it is our destiny.

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