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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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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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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I’m busy, and have been for a week. So I thought I’d leave you with some light reading:

The rental vacancy rates for the nation declined from 8.4 percent in 2009 to 7.4 percent in 2011, according to one of two American Community Survey briefs covering the housing market released today by the U.S. Census Bureau. Approximately four times as many metro areas experienced declines in rental vacancy rates as those that experienced increases. The share of U.S. households that rent rather than own increased from 34.1 percent in 2009 to 35.4 percent in 2011. Nearly a quarter of the nation’s metro areas saw a rise in renting households, while less than 3.0 percent of the nation’s metro areas saw a decline.

Rental Housing Market Condition Measures: A Comparison of US Metropolitan Areas examines four characteristics of the rental housing stock using American Community Survey data collected in 2009 and 2011. The characteristics are gross rent, gross rent as a percentage of household income, rental vacancy rates, and renter share of total households and describe changes comparing 2009 with 2011.

The brief found that more renters are spending a high percentage of their household income on rent. Policymakers use gross rent as a percentage of income as a measure of housing affordability, and it is often used to determine eligibility for housing programs. In this report, renters spending 35 percent or more of household income on rent and utilities are considered to have high rental costs.

The share of renters with high housing costs in the United States rose from 42.5 percent in 2009 to 44.3 percent in 2011. However, average rental rates in the United States declined from 2009 to 2011.

“While we saw a decrease in rental vacancy rates and pricing in some areas, the burden of rental costs on households increased across many parts of the nation,” said Arthur Cresce, assistant division chief for housing characteristics at the Census Bureau. “Factors such as supply and demand for rental housing and local economic conditions play an important role in helping to explain these relationships.”

Nationwide, only 11 metro areas reduced their shares of renters with high housing costs, while 62 metro areas increased their shares.

Among the 50 most populous metro areas, some of the heaviest rental costs were borne by renters in metro areas in Florida, California and Louisiana in 2011, despite rent declines between 2009 and 2011. These include Miami with 55.7 percent of renters experiencing heavy rental costs. Orlando, Fla. (52.9 percent); Riverside, Calif. (52.2 percent); and New Orleans (51.3 percent), whose shares did not differ significantly from one another, followed closely.

Among the 50 most populous metro areas, only two became affordable for more renters — Richmond, Va., with a decline of 3.2 percentage points in the share of renters with high rental costs from 42.7 percent to 39.5 percent between 2009 and 2011, and Buffalo, N.Y., with a decline of 3.0 percentage points from 45.6 percent to 42.6.

$AEC and $CLP and the renting class are still in effect.

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I just finished up looking over CLP’s end of year materials and voting my shares. They did a fabulous job – the multifamily theme continues to have powerful undercurrents carrying the REITs to success. Occupancy is so high right now; money is flowing freely and AEC and CLP are both pushing through massive expansions in the pipelines.

I continue to see good things coming from this sector. I will be maintaining my investment in both AEC and CLP.

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Sitting by the wayside while men of action seize the day is not an appropriate response to opportunity.

As such, I depleted my cash position to a meager 5%, adding heavily to BAS, CLP and RGR.

This is a trade on a belief that we are making a quick bottom and have higher yet to go. I’ll take expedient profits or losses on this, as I am serious about maintaining at least 20% cash (before hedges) at most times; from now until Summer, be my judge.

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