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AEC Beats And Michael Bilerman Loses Again

Here’s the brief take away from AEC’s earnings report.

The company still beat expectations across all lines, despite taking most of 2013 and a good part of 2012 off (they were scared of being short of cash and rebalanced). The stock dilutions did mildly impair performance per share, yet the stock is right where it started and year over year FFO still grew value. Besides, the company has hardly tried to drive ahead yet.

Towards the end of 2013, the company suddenly roared to life, acquiring three new properties and creating a joint venture with AIG Global Real Estate to develop the San Francisco market. The San Francisco note should be especially depressing to the string of analysts who have continually gone on the record that there is no way AEC makes it on the West Coast.

They are going to make it, you schmucks, and your reputation goes down in tatters.

Somewhere at Citi, Michael Bilerman is cowering in fear. His ‘doomshittery’ (trademark) leveled at Associated Estates Realty has crashed against the walls and come away with nothing. His obnoxious “questions” (most dubiously labeled) now ring hollow and foolish.

Shortly, Jeffrey I. Friedman, President, CEO and Hero (in the Greek sense) will emerge from behind his walls, give these serpents battle, and put whatever survives of their forces to flight, like the cheap cowards they are; as his last act of leadership.

But Michael Bilerman can be sure he will be struck down; not of the latter sort privileged to flee. He will get no respite to run, as Friedman has marked him for his asinine chicanery during certain quarterly performance calls.

Upon which Jeffrey I. Friedman will ride off into the sunset, going down as a man of legend amongst AEC shareholders.

In the meantime, dividends are up 7% from last year and I am bidding my time.

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Added To $AEC For $14.23

Threw some more cash onto one of my favorite positions for $14.23. People hate this stock for no reason. Meanwhile, it’s pumping out cash left and right.

Multifamily is the only real estate worth owning.

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Added To AEC For $15.45

I upped my stake in AEC for $15.45 a share for a few percent of my total assets. Equity issuances at prices below NAV and earnings misses built on top of those issuances aren’t a problem, per se, when they cause shareholders to panic and sell at yet more depressed prices.

Current cash stands just under 40%

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Naturally AEC Gets Disemboweled On Earnings Miss

If you’ve been following my mutifamily trade for any length of time, you already know that analysts absolutely “hate, hate, hate” this stock. They do not respect one Mr. Jeffrey I. Friedman, and work tirelessly to dethrone him.

AEC had a small miss on earnings and came in under expected revenue. For this, the company has been impaled by 3%, and the entire REIT space appears to be selling off hard.

I find the revenue, earnings, and FFO concerns to be dismissible for the moment at least. How many of these analysts were paying attention to the FFO blowout to begin with? Look at a long term chart of FFO growth in the multifamily space and then understand that what people are afraid of amounts to a zit on a rhino’s butt cheek.

It makes perfect sense that at this exact moment in time, it would have been hard for multifamily real estate to continue the 5% revenue growth the sector had been enjoying. Recall that FFO for AEC is up 30% for the first 6 months year over year between 2013 and 2012. That is gargantuan, and until now that cash flow has been directed continuously into reinvestment in the business.

Management at both AEC and CLP (and I presume other equally reputably managed multifamily REITs) took a very well announced break in the pace of acquisitions beginning sometime last year. They found that multifamily units had stopped selling at the rock bottom prices and became concerned about conditions that may impair access to financing. In short, they did what management is supposed to do; they applied the brakes, and got down to the business of actually using their brains and planning ahead.

The last 6 months has seen these companies redirect their cash flow away from reinvestment and into early debt extinguishment and balance sheet improvement. Both AEC and CLP have seen their credit scores upgraded inside of the last year. Once the easy money from financing activities is taken off the table, we’ll likely see a resumption of that high paced revenue growth we saw before.

As demand for rentals remains strong, and the market seems to be easily absorbing rates increasing (recent rates have been increasing at an annual rate of 3.2%), we may see a resumed push into asset acquisitions. AEC announced another purchase this month just before filing. If prices are not good enough or desirable locations can’t be found, then land development will take off.

If demand for new apartments starts to slacken or the company feels that new assets would not serve the network of apartment communities advantageously, then the bounty of FFO that has been built up over the last three years will be focused into a dividend yield hike that showers patient shareholders with cash.

The very large body of free cash flow from operations that has been painstakingly assembled here provides shareholders with a bounty of options. What confuses me, with AEC, is that their FFO is no less desirable, yet priced at a discount to the rest of the sector.

Consider CLP – I was buying them at $17-18 a share, at the same time I was buying AEC for $14-15. For all purposes, they are the same company. I have watched as AEC and CLP mirror each other’s moves practically perfectly; acquiring properties at the same time, paying off debt at the same time, sitting on their hands at the same time, engaging in strategic sales and expense reduction at the same time.

They are nearly identical in every aspect, yet over the last two and a half years, CLP has run to $25 a share, whereas AEC has been squashed repeatedly in its attempts to rally, today trading for $16.

At this discount, I am left to assume that AEC is a prime takeover target. CLP was recently merged into MAA. The sector is primed for some consolidation, with all this money sloshing around. Maybe AEC can get bought out too. I must trust that the great Mr. Jeffrey I. Friedman will do what is in the best interest of us shareholders. He has faithfully adhered to that standard so far.

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AEC Earnings – Small Disappointment But No Problem

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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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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