After that earnings “miss”, AEC spent the day moonshotting, up 2.63% at the close.

CCJ and CLP and silver also went on runs, respectively.

Generally speaking, I did not notice the market bloodletting into the end of the day.

However, that will likely not last. I fully expect to be sucked into the black hole with the rest of you clowns, thanks to your insistence to maintain exposure to every stock in existence, your bad budgeting habits, and all around your general propensity to attract suffering to your persons at all times. It’s a bad combination, and one that will leave everyone around you wishing you were not around.

Always remember, the best way to avoid being miserable is to leave the misanthropes and morose of the world to their morbid, self pittying. Let them die alone, out of sight, please. That state of mind is a habit, infectious, and I have happiness to be enjoying contentedly.

Unfortunately, that is not an option here. If the market starts to turnover, my good day will be in hindsight just a retrace to “support”…from that imaginary line, things will go rather straight down.

However, rather than trying to micro manage my positioning, I’ve decided to accept things the way they are.

I like my three stocks quite a lot, and silver just as much.

And as for the sordid deflation that your heavily indebted and most unemployed nature are threatening to engulf us all in?

Why, that’s what 35% cash positions are for, good chum!

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AEC had funds from operations of $0.32 a share, after accounting for dilution. That’s about in line with earnings expectations of $0.33 a share. And before adding back in a $0.039 one time charge used to prepay loans.

Let me rephrase that; AEC pulled as much money from operations alone as analysts expected from ALL earnings, before counting any one time line items.

With one time line items, AEC made $0.54 a share, beating earnings expectations by a wide 63.6%. After that dreaded dilution, that’s still pulling an easy $0.46 a share without the company expanding their operation (the company WILL be expanding its operation).

Those line items that produced the excess gains came from the sale of some of their properties. Here’s the thing; those properties have already been replaced, so their sale will not impact operations either.

In fact, the replacement properties are easily 20 years younger than those that have been disposed of. And they probably bring in more money. Average rents of same communities for AEC are up to $1,024 a month, versus $969 a month this time last year.

Oh, yeah, and occupancy of same communities stands at 97.0%

Anyone want to bet that AEC isn’t buying apartments that it can charge more for and fill up quicker than its standard operation?

That’s the entire strategy of management; roll over the existing operation into younger buildings, that are more easily serviced, and pocket the difference, while still growing.

The only one of my key assumptions I listed yesterday that was violated was the “no earnings” prediction. The company had earnings – a ton of them. At their current earnings, AEC is going for just 6.7X their earnings. And trading pretty close to book value.

That’s crazy.

I sort of wish they were still booking losses, because while they were doing that, they were acquiring like mad. They still seem to be interested in acquisitions, but those acquisitions will not be financed by tax free revenue now, it seems.

Their new interest is – credit.

AEC’s management raised just under $100 million in cash in the last 6 months BEFORE counting lower payments from restructured debt. Uh, hi, yeah, AEC is only a $1.1 billion company with $700 million in debt. If they took that money and hit their debt, that’d add another $0.11 onto FFO by itself (although admittedly lowering FFO per share on net after factoring in dilution from not expanding the business).

So we have a company that is continuing to be graced by strong secular trends in housing pushing people into rentals, strong secular trends raising rental rates, strong secular trends in mortgage rates, who have used this opportunity to restructure their operation into signficantly younger properties in easier to maintain, higher desirability locations, and who now are preparing to lower costs even further by improving the company’s credit rating.

And you want to value such a company at 6.7X earnings and par for book value? What the hell is wrong with you?

But the best part is, I KNOW I am completely on mark when I say the downgrades and earnings commentary on this company are completely, 100% algorithm driven, and totally off the mark. One of the first announcements that followed the company’s own disclosure tried saying earnings were $0.32.

No! FFO was $0.32. Earnings were $0.54.

But hey, thanks for playing. I now am completely convinced that the overall majority of opinion on this company is completely off base, created by computers who’s builders never bother to check the drivel that they spit out.

I will continue to hold AEC, and to accumulate it on all dips, much like the one it is experiencing now.

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I draw your attention on this evening to two things, before taking my leave for bed.

The first is ERY, which persists in rolling over. (I have a small 5% position which I’ll take losses on at $10, no holding out here).

The second are my stocks; AEC, CLP and CCJ. I have gotten good at reading them, as they’ve been a part of my party for a while now.

When things get bad, these three stocks crater. AEC and CLP are small and people don’t trust housing. And CCJ is just insanity (not to be confused with “linsanity”).

All three have been resilient, bouncing.

I’m not skilled at reading the tea leaves. I tend to focus more on the flesh eating parasite attached to your skin, or the fires rising from your house, when trying to fortell the future. But, I would not be surprised in the slightest if we are on the cusp of another mind numbing Fall rally.

Rather than fighting it, or worse, trying to embrace it with 2X margin leverage, why not just raise 20%+ cash, put the rest in some steady longs, and call it a day?

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Hello, and I hope the new week finds you well.

My own weekend was quite nice, filled with beer from local microbreweries and good food.

I have just finished some leftover prosciutto-wrapped tilapia, actually, which we made last night; garnished with fresh zucchini and squash, and topped with some delectable Kalamata olive – all covered in liberal amounts of lemon pepper – and served with a side glass of Sauvignon Blanc.

As for the markets; I am all too aware that we are approaching the season where – for two years in a row now – my entire strategy has gotten clobbered without mercy.

I wonder, what will it be this year?

Perhaps scientists will discover that all uses of silver can be replaced with pop rocks?

Maybe, AEC goes bankrupt?

Or the UN puts forth a treaty, signed by all nations, permanently banning all power generation from uranium?

The possibilities are delightfully endless. All I know for sure is that October is a horrible month, and I hate it.

Now, I am opting to hold a hefty cash position with a large side of silver, just in case we get massive intervention. This is as opposed to outright shorting of stocks or commodities.

I’m as realistic as ever about the chances of a recovery here. There’s just too much drag on the system; and we’re “blessed” to have all the wrong people in charge just when we need real intelligence to implement reforms.

But if we’re to go down from here, I will profit from having a cash position, not generating cash flow from short positions. It’s too risky, in my opinion, that the market reverses and runs higher into the Winter months.

Firstly, shopping picks up in the winter.

Secondly, we have to be getting nearer to some desperate moves getting made by desperate people.

And thirdly, the market HAS run higher in the Fall for the past two years. The statistics crowd should be all over this.

So I’m not really gung ho about the economy or much of markets. But I have relearned how to step aside and let the crowd exhaust itself before reasserting my dominance.

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Good morning, dear readers. I hope you’re bright eyed and comfortably breakfasted on this fine July day.

For some reason, the highways were rather sloth this morning. It seems everyone was in a contented daze. No matter. I would normally be irritated by such retardation, yet I just cannot find any reason to ruin an almost alien mood of gratification I’m in.

Upon ascending the nine floors to get to my office, I was greeted at the door by CLP, my good REIT, breaking well above $23 and forming new highs, for our pleasure – those of us who have invested good capital with them.

Smashing.

I’ll be taking off at noon today, to play some golf. Don’t let the good weather slip by you.

Regards,

Cain Hammond Thaler

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Late yesterday, at about 3:30, Associated Estates Realty Corporation (AEC) came out and announced that they were going to raise some money through a public offering of 5.5 million shares (comes out to about $76 million, or $14.40 per share).

Based on the market’s reaction, you would have thought they had announced that AEC was actually secretly a Chinese lumber company.

The stock immediately shed 2%, plummeting from $15.20 into the close. Last night was a bloodbath. It ended up opening today at $14.41. In a single night, AEC lost 5% of its market cap.

HOLY SHIT! They’re raising cash, so the market sets the company share price at what they’re getting from the underwriters?? Are you people high?

It seems we need to have a little discussion about raising money, and what it really implies.

But first, grab all those little books you have on capital raises, where savvy sounding professionals wearing douchebag-y clothing while waxing philosophical on the front cover, recite three hundred years worth of “rules of thumb”. Throw them into a pile, douse them in gasoline, and set them on fire. Then gather up the ashes, and ever so fastidiously, cram them up your ass.

That’s how many out-of-context Warren Buffet quotes I want to see in my comments section. You have been warned.

Rather than assuming that all capital raises are inherently bad, evil, dilutive things, let’s instead ask a simple question: when, exactly, do capital raises hurt outstanding investors?

Well, when they cut into a companies value. So anytime the shares sell for less than they’re worth. That’s bad.

Or when they cause the company to give away earnings to too many different places and suddenly any premium is overpriced and cash flow expectations are overpriced. That’s bad.

Or when the new capital has rights or priviledges that undermines the rights of existing shareholders, and sidelines them into an unfair position. That’s bad too.

Or perhaps when the capital raise is smoke tipping off something that’s very wrong with the company. All bad.

Or maybe when there’s some kind of fraud going on, because the company isn’t being honest about how many investors are really oustanding, and the sale is actually a red flag that your company is managed by criminals. That’s really bad.

So let me ask you; what’s the big fucking deal?

It’s not like AEC is desperate for cash, on Death’s door with the harpies flying overhead. They’re a $700 million dollar entity sitting on $6-13 million. They have annual expenses of $140 million, revenues of $172 million, and are modestly leveraged with debt equal to 70% of their total assets (all at insanely cheap rates, courtesy of the Fed). And they’ve secured enough credit lines to weather their debt load for several years.

Oh yeah, and AEC is a cash cow. While reporting that they’re losing money, their operations are generating a cool $50 million a year in untaxable cash flow. So they’re doing what any sensible company with deep pockets and record low prices would do – they’re buying everything they can. In fact, because they’re running with the black hole-budget accounting methods that are depreciation adjustments in a real estate centered environment, their net cash flow is up 70% inside of four years.

All of that money is going straight back into the company. In fact, they generated surplus revenue from also refinancing/closing/restructuring their debt. All of that $50 million a year right now is going out, buying up properties, and building AEC into a steadily larger, more competitive organization.

Which brings us back to the idea of capital raises. Why are you such a squirly little bitch?

Let’s say I have a company – we’ll call them Opportunistic Co. – that has a book value worth $900 million with 900 million shares outstanding, or $1 a share of value, including too little cash to really do anything with. Now let’s say an awesome investing opportunity comes along; the price tag is another $100 million. Opportunistic Co. has a choice to make – they can pay up for that opportunity (which based on Associated Esta – oops, I mean Opportunistic Co.’s – track record would generate a cool 16% ROI annually before taking into account any debt extinguishment or unrealized property appreciation), or they can puss out and go home.

So let’s say Opportunistic Co. decides, “hey, I want to take advantage of this” and they raise that $100 million by selling shares for $2.00 a pop.

Oh God! No! dilution…!

They take that $100 million that they raised by selling 50 million shares on the open market and put it on their books. And low and behold, they now have a $1 billion value, with 950 million oustanding shareholders.

And shares worth $1.05 apiece.

That’s right, miscreants. If you did the math, Opportunistic Co. just raised their book value, because the people who bought into the idea, and thereby their company, did so at a premium.

Now, I know this isn’t fail safe. Lots of companies trade at big premiums to their value, because people are banking on high growth rates. Capital raises can be a real threat to them, because if that money isn’t applied correctly and doesn’t generate enough funds to pull its own weight, suddenly those growth rates aren’t enough to justify the high price.

DOES AN REIT COMING OUT OF A HOUSING RECESSION SOUND LIKE A FUCKING GROWTH STOCK TO YOU?

AEC’s shares are trading very reasonably, just a little greater than their net worth. Their price to earnings is low. They’re operating income and revenues, from sky high occupancy rates and increasing rents, are running higher. They are a stealth-growth company trading like a utility.

And besides, both Opportunistic Co., and in real life AEC, already know what they’re going to do with the God-damned money. They already have the investment lined up, people. AEC said right when they were raising the cash, “hey, same shit…”. They have been killing it. Why should I be worried, without evidence, that they’ve suddenly forgotten how to manage a real estate company?

And if at any point, some or all of these properties start to actually go up in price…well then taking the time to raise the money, and make the call, will be a boon to ALL the company’s shareholders, probably better than if they hadn’t made the purchase at all.

So excuse me for thinking that MAYBE sometime between now and the end of time, we might just have a real-estate recovery.

But here’s what really bothers me.

Let’s have another little example. Let’s say there’s this other company – Superstar-Bullshit-Celebrity Managers Enterprise – who are also worth $900 million, with 900 million shares outstanding. And let’s say, for the humor of it, that a third group of investors beats both companies to the draw and acquires the opportunity first.

This third group raises the $100 million (raising capital, incidentally) by soliciting what happens to be $2 a share from an underwriter and forms the new corporatation – Sucker’s Buy Co. – which has 50 million shareholders

Now a not-meaningful amount of time passes, and the super smart SBC Enterprise managers decide, “hey, you know what, we’d like to have that property owned by Sucker’s Buy. I think we should buy it.” Never mind that Sucker’s Buy has been in business for like, a month, and has already given away all their revenue in the form of special dividends. So they get the paper work in order, and start the M&A process.

But of course, we can’t just buy Sucker’s Buy at market price – how would Sucker’s Buy’s investors be rewarded for their precious month of time? No, we need to run a leveraged buyout on these fuckers, giving them $2.50 a share. It’ll all be worth it later on, after all. SBC Co. can leverage SB Co’s operation to optimize synergies, and shit…

So SBC purchases the same thing – exactly, identically, the same thing – for an extra $25 million than it’s listed. And all financed, naturally.

And after goodwill gets rectified, SBC’s shares will be worth only $0.97.

But you and I both know, in this situation, SBC’s bullshit stock would rally.

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