As an income-driven investor always in search of a sustainable mid-to-higher yielding REIT play, I've decided to shift my focus to the apartment REIT sector and highlight several of the reasons why I'm staying fairly bullish on shares of Associated Estates Realty (NYSE:AEC).
Investors should note that Associated Estates Realty Corp. is a real estate investment trust (REIT), headquartered in Richmond Heights, Ohio, and operates a portfolio consisting of 54 properties that contain a total of 13,964 units.
#1: Recent Performance & Trend Behavior
On Friday, shares of AEC, which currently possess a market cap of $816.67 million, a forward P/E ratio of 33.57, and a dividend yield of 4.65% ($0.76), settled at a price of $16.35/share. Based on their closing price of $16.35/share, shares of AEC are trading 6.11% above their 20-day simple moving average, 7.83% above their 50-day simple moving average, and 2.61% above their 200-day simple moving average. These numbers indicate a short-term, mid-term and long-term uptrend for the stock which generally translates into a moderate buying mode for both short-term traders and longer-term investors.
#2: 5-Year Dividend Behavior
Since January 14, 2009, the company has increased its quarterly distribution twice over the last five years (representing an average increase of 2.35% over the last five years), with the most recent increase having taken place in January of this year. The company's forward yield of 4.65% ($0.76) coupled with its ability to increase its distribution twice over both the last 24 months, make this particular REIT play a highly considerable option, especially for those who may be in the market for a sustainable stream of higher-yielding income.
#3: Comparable Dividend Growth
Not only does the company's 4.65% yield and positive dividend behavior make the stock attractive but from a comparative standpoint its dividend growth over the last five years versus a number of its peers also makes it quite the considerable income-driven play. For example, AEC's dividend has grown a solid 11.76% over the past five years whereas the dividend growth of BRE Properties, Inc. (NYSE:BRE) has actually fallen 29.78% over the past five years.
#4: Recapping Q3 and Looking Ahead to Q4
Net operating income (NOI) for the third quarter of 2013 for the Company's same community portfolio increased 6.1% compared to the third quarter of 2012. Revenue increased 3.0% while property operating expenses decreased 1.7%. Physical occupancy was 95.8% at the end of the third quarter compared to 97.2% at the end of the third quarter of 2012. Average monthly net rent collected per unit for the same community properties was $1,127 compared to $1,098 for the third quarter of 2012, a 2.6% increase. Operating margins were 62.3% for the third quarter of 2013 compared to 60.5% for the third quarter of 2012.
Looking ahead to the company's Q4 results, in which analysts are calling for AEC to earn $0.33/share in terms of FFO (which is $0.01/share better than the company had reported during Q3) and $48.39 million in terms of revenue (which is $1.02 million higher than the company has reported during Q3).
I think that if the company can demonstrate increases in physical occupancy (to the tune of at least +0.8%) and average monthly rent (to the tune of $1,150 or higher), I see no reason why such estimates can't be met or even slightly exceeded.
#5: AEC's Expansion in North Carolina could boost Physical Occupancies and Rent Revenues
According to the company's most recent investor presentation (dated 11/13/2013), AEC holds a total of five properties within the Raleigh-Durham and Charlotte regions of North Carolina and has plans to acquire four additional properties within those regions during the fourth quarter of 2013 and the first quarter of 2014. The company's position in Raleigh-Durham currently consists of three properties containing 760 units and with plans to acquire two more properties during the fourth quarter of 2013 that contain an additional 349 units, that position will increase nearly 46%. The company's position in Charlotte currently consists of one property containing 295 units and with plans to acquire two more properties during the first quarter of 2014 that contain an additional 267 units, that position will increase nearly 91%.
(Source: Presentation Dated 11/13/13)
By increasing its presence in North Carolina, through the acquisition of four additional properties over the next two quarters, not only does AEC increase the total of number of potentially occupied units in its portfolio by 616 units, it almost certainly increases the revenue that is generated when occupants make their monthly rent payments.
Risk Factors (Most Recent 10-K)
According to the company's most recent 10-K there are a number of risk factors potential investors should consider before establishing a position in Associated Estates Realty. These risk factors include but are not limited to the following:
#1 -Risks which may be inherent in the real estate business and the operation of a REIT
There are a number of risks that may be inherent to both the real estate business as well as the operation of a real estate investment trust. For example, some these risks include changes in the economic climate and specifically in the markets in which the company owns and manages properties, including interest rates, the overall level of economic activity, the availability of consumer credit and mortgage financing, unemployment rates; competition from other available multifamily units, single family units available for rental or purchase, and changes in market rental rates; expenditures that cannot be anticipated such as utility rate and usage increases, and unanticipated repairs; the company's ability to acquire properties at prices consistent with our investment criteria; and lastly, risks associated with property acquisitions such as failure to achieve expected results or matters not covered in due diligence.
#2 -Certain Financial Covenants could limit the REITs ability to achieve numerous strategic objectives
The agreements governing our unsecured credit facilities contain certain restrictions, requirements and other limitations on our ability to incur additional secured and unsecured debt, acquire additional land or development properties and make other strategic investments or business acquisitions or dispositions. These agreements also contain certain financial and operating covenants including, among other things, maintenance of certain financial ratios.
For those of you who may be considering a position in Associated Estates Realty I'd keep a watchful eye on a number of things over the next 12-24 months as each could play a role in both the company's near-term and long-term growth.
For example, near-term investors should focus on the recent performance and trend behavior of the company while longer-term investors should focus on how well the company is able to maintain its growth-by-acquisition strategy in regions of proven success (such as North Carolina) while simultaneously seeking out regions in which to acquire additional properties (such as Doral West a 388 unit complex in Doral, Florida and Rienzi at Turtle Creek which a 152 unit complex in Dallas, Texas) where it has recent acquired the an effort to further develop and enhance its brand as a leader in the apartment REIT sector.