REIT Focus: Associated Estates Realty Corporation

| About: Associated Estates (AEC)


Associated Estates Realty Corporation ("AEC") is an apartment REIT that owns 53 apartment communities with 13,676 units as of 12/31/13.

AEC has 57.6 million shares outstanding, a market capitalization of $992 million and a 4.4% dividend yield.

AEC is a well managed REIT with a portfolio of primarily Class A apartments, however, we are not recommending purchase of the stock at the current expensive price of $17/sh.

This month's REIT Focus from our commercial real estate newsletter, View of the Market, is on Associated Estates Realty Corporation (NYSE:AEC), a publicly traded REIT engaged in multifamily ownership, operation, acquisition, development, construction, disposition and property management activities. As of 12/31/13, AEC owned 53 apartment communities containing 13,676 units in ten states and a commercial office building containing 78,800 sq. ft. The properties are located in FL, GA, IN, MD, MI, NC, OH, TN, TX and VA. AEC also has 972 units in development projects and 626 units in joint venture developments in TX, MD and CA. The average occupancy, monthly rental rate and rent increase as of 12/31/13 were 95.4%, $1,255 and 3.6%, respectively.

AEC went public in 1993, is incorporated in Ohio and has a dual listing on the NYSE and NASDAQ. AEC is based in Richmond Heights, OH and its debt is rated Baa3 by Moody's. AEC has 57.6 million common shares outstanding and a market capitalization of approximately $992 million.


Mr. Jeffrey I. Friedman, 62, is Chairman, President and CEO and joined AEC in 1974. Mr. Friedman has served as Chairman and CEO of the company since 1993 and has more than 40 years of real estate experience. Mr. Lou Fatica, 47, is Senior Vice President, Chief Financial Officer and Treasurer and joined AEC in 1999 as Controller and was promoted to Vice President, Controller in 2000. Mr. Fatica assumed his current role in 2001. Mr. Jason A. Friedman, 39, is Senior Vice President, Acquisitions and Development and joined AEC in 2009. Mr. Friedman is responsible for overseeing the company's acquisition efforts including the purchasing of new assets and for all new development and construction activities including the purchasing of new land, design and entitlement.

Financial Data

Select financial data for AEC as of the 12/31/13 10K and supplemental data for the period 1/1-12/31/13 is as follows (in millions where applicable):

Real Estate Assets, Gross $1,751
Total Assets $1,422
Mortgages Notes Payable, Unsecured Notes and Credit Facility $813
Common Stockholders' Equity $544
Revenue $181
Net Income $61
Net Income Per Share $1.18
Cash Flow from Operations $73
Unsecured Revolving Credit Facility ($350 with $133 used) $217
Market Capitalization $992
Property Debt to:
Gross Real Estate Assets 46%
Market Capitalization 82%
Enterprise Value 45%
Dividend and Yield ($.76/sh.) 4.4%
Valuation Methodology:
2013 Revenue Per Above $181
Less: 2013 Operating Expenses (excluding depreciation, amortization & interest expense and plus G&A expenses averaged at $17M) 86
Annualized Net Operating Income 2013 $95
Projected Inflation Rate at 3.5% x103.5%
Projected Forward NOI for Next Year $98
Projected Cap Rate 6.25%
Projected Value of Real Estate Assets $1,568
Add: Investment In Unconsolidated Entities (at book value) 9
Total Projected Asset Value $1,577
Less: Total Debt Per Above (813)
Net Operating Working Capital (16)
Projected Net Asset Value 748
Common Shares Outstanding 58.9M (57.6M common stock shares and 1.4M equity based incentive/drsu shares less .1M treasury shares)
Projected NAV Per Share $12.70
Market Price Per Share on 3/14/14 $17.22

Financial Metrics

The gross real estate assets, property debt, revenues, net income (loss), funds from operations, return on invested capital and dividends per share for the years 2009 through 2013 are shown in the table below:

(millions except per share amounts) 2009 2010 2011 2012 2013
Gross Real Estate Assets $936 $1,210 $1,345 $1,512 $1,751
Property Debt $526 $556 $665 $717 $813
Revenues $101 $124 $150 $158 $181
Net Income (Loss) $6 ($8) $5 $31 $61
Funds From Operations $20 $26 $43 $57 $66
Return on Invested Capital (1) 3.5% 2.5% 1.6% 2.6% 2.5%
Dividends Per Share $.68 $.68 $.68 $.71 $.76

(1) This is the ratio of NOPAT divided by stockholders equity plus property debt and measures the return the REIT is earning on its invested capital.

As shown above, our net asset value per share for AEC is $12.70/sh. versus a market price of $17.22/sh. Current average cap rates for apartment properties per our industry experience and CBRE's Cap Rate Survey are in the 5% to 9% range, depending on the location, age and quality of the property. We have used an average cap rate of 6.25% due to AEC's portfolio being primarily well located Class A apartments.

AEC's strengths, weaknesses and our recommendations are as follows.


· Solid management team.

· High occupancy of 95.4%.

· Diversified portfolio of Class A apartment assets.

· Low leverage at 45% of enterprise value.

· 87% asset growth since 2000.

· Attractive dividend yield of 4.4%.


· Negative working capital of $16 million.

· Low cash balance of $4.5 million.

· Development and joint venture projects projected to earn only 5%-6.2% returns on cost.

· High stock price.


We like AEC and think it is a well run apartment REIT with a solid portfolio and an attractive dividend, however, the current price of $17.22 per share is too expensive and equates to a 5.2% cap rate and therefore, we are not recommending to our clients to purchase the stock. If the stock backs up to the low teens, we would recommend the purchase. Home Properties, Inc. (NYSE:HME) is a better apartment REIT that we recommended for purchase in a November 2013 REIT Focus at $54/sh. and is now trading at $60/sh.

A five year price chart of AEC is shown below:

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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