Associated Estates Realty: A Unique Acquisition Opportunity

Jun.28.12 | About: Associated Estates (AEC)

On June 11th, Associated Estates Realty Corporation (NYSE:AEC) announced that it waved due diligence on a property acquisition near Raleigh NC. This allowed AEC to close on the deal before the property was even listed for sale. Acquisition of such an aggressive nature was made possible by a former purchase of the Arboretum apartments near Raleigh, as AEC already had an excellent understanding of the local market. Further information on these acquisitions is available through a Press Release.

Perhaps even more intriguing was the June 22nd underwritten stock offering in which 5.5mm shares were issued to the public at a price of $14.40. Proceeds of approximately $87.2mm (if underwriters execute their options in full) are intended to fund acquisitions. Announcement of issuance so far below recent market prices sent the stock plummeting from a high of $15.29 on June 21st to a low of $14.30 on June 22nd. This massive drop was from an already discounted price as AEC traded in the $16-$17 range for much of the year. Consequently, investors are given an excellent entrance point into a stock with strong growth potential

Company (ticker)

Market Price 6/22/12

Annual Dividend $

Annual Yield %

6/22/12

Est. Price/FFO

Associated Estates

$14.60

$0.72

4.93%

11.6

Sector Avg.

n/a

n/a

3.38%

17.7

Click to enlarge

With above average yield, the lowest price/FFO in the sector and a dramatically reduced price relative to its own price history, Associated Estates Realty seems like the ideal stock to buy in the multifamily sector, but is the company worthy of investment?

Financially speaking, AEC is in solid shape. On the revenue side, FFO is up to $0.25 per share from $0.23 the year prior despite net one-time cost events of approximately $1.4mm in 2012. With fixed rate debt financed at a weighted average rate around 5.5% and a $350mm unsecured credit facility at a 1.89% rate as of 6/18/12, FFO easily covers debt expenses. We can expect both FFO and debt to increase continuously in the near-term as AEC continues to make acquisitions and develop new properties.

Success of this expansion will be heavily affected by the strengths of the local and national markets. The U.S. census reports positive migration throughout Texas and North Carolina which portends favorable performance from AEC's recent acquisitions near Dallas and Raleigh. Associated Estates also seems on the ball with dispositions, having recently sold properties in Georgia and Michigan which have minimal and negative migration rates respectively. On the national level, Witten Advisors (a prominent researching firm in the field) predicts continued increases in rental rates and NOI in the multifamily sector for the rest of this year and 2013.

While the price has gone up a bit since its low-point, AEC still provides excellent opportunity for capital appreciation and yield. Excluding an economic downturn, the outlook of its recent acquisitions and the company as a whole is superb.

Disclosure: 2nd Market Capital and its affiliated accounts are long AEC

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.