Highlights for the First Quarter 2012
• Multifamily same-property NOI increased 8.3 percent compared with first quarter 2011
• Multifamily same-property revenue increased 6.0 percent compared with first quarter 2011
• Ended the quarter with multifamily same-property physical occupancy of 96.0 percent
• Acquired the 350-unit Colonial Grand at Brier Falls in Raleigh, North Carolina, for $45.0 million
• Commenced development of Colonial Reserve at South End, a 353-unit apartment community located in Charlotte, North Carolina
• Entered into a new $500 million unsecured revolving credit facility; and
• Standard & Poor’s upgraded the company’s senior unsecured notes rating to BBB-

And CLP hits it out of the park too, with a 20% increase in Funds from Operations, from this time last year. This multifamily rental business, just like AEC (which I touched upon earlier this week) has been graced by the wonders of high occupancy, rising rental rates, and cheap property to pursue growth by.

And so naturally, the stock is off more than 2%, with idiotic algorithms and fund managers who don’t understand how REITs function selling the name, because of the $0.07 loss taken on the shares.

I don’t care about the loss. I encourage the loss. When the company is taking a loss, they aren’t paying taxes. When they aren’t paying taxes, I’M NOT PAYING TAXES. Meanwhile, the pool of money allocated for dispersion to unit holders, sometimes referred to as “that stuff I get paid with” swells enormously. It’s huge growth, and it’s uninterrupted and tax free, from corporate accounts to me.

Just like AEC, they are pursuing a strategy of growing their revenues through a combination of expansion into younger properties and strategic sales of assets to make their network of properties more closely knit (and subsequently more efficient with management/maintenance staffing).

In the words of CEO Thomas Lowder:

“Rental rates have been increasing, turnover has remained steady and occupancies have remained high. We are excited about heading into the spring leasing season with this level of operating momentum, and as a result have increased our same-property NOI growth assumptions included in our 2012 guidance. At this point in the cycle, we remain focused on unlocking the value of our land through developing and simplifying the business through selective commercial dispositions.”

Here are the company’s goals for 2012, as laid out in their earnings release:

• Multifamily same-property net operating income: growth of 6.00 to 8.00 percent.
o Revenue: Increase of 4.75 to 5.75 percent
o Expense: Increase of 2.50 to 3.50 percent
• Development spending of $125 million to $150 million.
• Acquisitions of $100 million to $150 million.
• Dispositions of $100 million to $150 million.
• Land and for-sale residential property dispositions of $5 million to $10 million.
• Corporate G&A expenses of $23 million to $24 million.

The company is worth about $12 a share right now, meaning it’s trading at less than 2X that. And there is absolutely no way people are adequately reflecting the true earnings potential of these REITs into their considerations right now. I’m pretty sure you can’t trade at a multiple of a loss.

Plus, if CLP manages to follow through on their earnings goals above (and I firmly believe they will), then they may very well have to start expanding into new properties outright without accompanying disposition of assets, just to keep from posting an earnings gain…

One day, after these companies have had their fun, and fueled their aggressive growth with tax free revenue and dirt cheap loans, they will simply allow their depreciation schedules to expire without adding more properties. When that happens, the earnings surprises that will hit the market will absolutely floor small minded fund managers, who will then pay great sums to have “those smart REIT investments” in their catalog of 1% allocations.

To date, I’m up about 13% in AEC and 30% in CLP, and I’m more than happy to keep holding.

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I don’t know that loans for homes have ever been this low before. I have friends who are refinancing their mortgages for another 30 years, just to lock in the pricing. But keep in mind that these friends are not the kind of people who necessarily need the help.

I’m curious what the Fed’s reaction will be if cheap money does not finance a resurgence in housing. Will it totally floor them that monetary policy can have no effect? I think Bernanke is much smarter than people give him credit for, but it could definitely shake the faith of some of the “less worthy”; certain unnamed officials from California, for instance.

I wrote a piece back in July talking about the effect that income will necessarily have on the price of housing. In it, I speculated that we could see a resumption of downward trending prices, even after the temporary reprieve we got through that spring.

The question is a matter of duration; how long until we hit the fat middle of the population in our distribution? In the real world, that translates into: how long until the middle 50% of the population has made enough to buy a home again?

Based on what I saw when I started looking at income distributions, what I saw was that there is the potential for a very large lull after the higher incomes have had their opportunity to buy in. I have no reason to believe that cheaper money from lower treasuries will correct for this.

The Fed seems to be betting it all on lucky number 32; if housing prices rise, it would do wonders to pull the country out of its funk. And sure, that’s probably true; but there are other problems here. Banks just aren’t going to give loans to anyone who doesn’t have a reasonable down payment; at minimum it would make them look bad. That suggests we need to wait until we start seeing savings sufficient to cover that 20% down, or whatever it will be.

Another big issue I’m seeing is with the vacant homes themselves. Imagine, some of these places have been vacant for almost three years now; some longer. I don’t even want to think about the kind of structural problems they’ve been developing in that time. Small maintenance issues left untreated for years become large foundational issues. So even if we start to see a push higher in home prices, the problem has been persistent for so long that plenty of these properties are going to be worth less to a potential buyer than they are on paper. They’re going to be huge headaches; rotting infrastructure that will require lots of investment of money, time, and effort, just to make them hospitable again.

I won’t be surprised if, when the time comes, lots of these properties remain vacant simply because nobody wants to deal with them. The current holders of these distressed properties aren’t going to want to put any more into them, so the option starts to become a choice between letting it go at prices way below current market just to get it off your hands and into someone’s care who will stop the deterioration process, spending the money to demolish the home, or letting it stand as is.

Two of those choices are bad for local real estate markets, and the one that isn’t requires the holders of the distressed mortgage to take the time and energy to claim ownership of the property and then sink money into tearing down the house.

At any rate, only time is going to really work out these issues, so I don’t see housing prices bottoming in 2012. My intuition tells me around 2014 is still as good a guess as any, but definitely not this year.

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