Buy-Rating Given To Associated Estates Realty (AEC), A Deep-Value Name Says Leading Industry Analyst
August 23, 2010 - The Wall Street Transcript has just published REITs Report offering a timely review of the Real Estate sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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William Acheson joined The Benchmark Company, LLC, in July 2008 to cover the REIT sector. His 17 years of experience prior to joining Benchmark span three major real estate cycles. Most recently Mr. Acheson was a Senior Analyst at Merrill Lynch, where he covered apartment REITs for four years. Before joining Merrill Lynch, he spent four years as an apartment and retail REIT Analyst with Smith Barney, and three years as an apartment, retail and industrial REIT Analyst with Prudential. In 2008 Mr. Acheson was ranked the number three real estate stock picker in The Wall Street Journal's "Best on the Street" survey. In 2007 he was ranked the number two apartment REIT analyst by Institutional Investor in the "use of analyst" category.
TWST: Simon is one that posted stronger-than-expected results for the second quarter. Because Simon is in the mall space, one might think it would be especially prone to depressed discretionary spending as opposed to grocery-anchored REITs. What are your thoughts on Simon right now?
Mr. Acheson: Simon (SPG) is an exceptional case. They beat the Street by a good margin; they beat their own guidance, and it's particularly telling because their guidance had included earnings from the huge 2.3 billion Prime Outlets acquisition, which has yet to close. By my numbers, Prime would add, on an annual basis, about 0.2 to annual FFO. And Simon still beat guidance. It's pretty impressive. Also they were probably being a little conservative in their guidance. But on the sales front, trailing 12-month sales were up 3.9%. Quarter-over-quarter they said they were up 4.9% - again, exceptional. Occupancy has been going up a little bit at a time; it was up 80 basis points year-over-year. So overall for Simon, it is an improving situation. You do have leasing spreads that have fallen from a positive 17% a year ago to just over 1% in the second quarter, so that shows that even the mighty Simon is not immune. But if you have to give anybody the benefit of the doubt, it's Simon.
TWST: What are your "buy" recommendations right now?
Mr. Acheson: I have a total of four "buy" recommendations right now. On the apartment side, I like Associated Estates (AEC) and also BRE (BRE). AEC is a deep-value name, trading at almost 20% below NAV. The portfolio has weathered the recession very well due to a 57% concentration of low-beta assets in the Midwest - these markets did not see a huge supply of new product over the last 10 years and has thus fared better than many of the coastal markets in the downturn - and they have very high-quality properties in the Midwestern markets, very well located in supply-constrained markets. AEC's rent rates, portfolio-wide, average 20% above their in-market comparables. It has a high dividend yield and an excellent management team, but primarily it's a deep-value story. Any time you see something trading at 20% below NAV, you have to pick up and take notice.
BRE is my only other "buy" in the apartment sector. It's trading at about 10% below NAV, and the main reason that I like them is because you have West Coast recovery potential. There have been some inklings that certain select markets in California are getting better. Eventually the West Coast is going to come back into its own, and so if you are willing to be a little bit patient, a stock trading at 10% below where it should on a very conservative net asset value construct, that's one that deserves a look at.
In the manufactured-home community sector, there is Sun Communities (SUI). This is another discounted name. The whole manufactured-home industry has had a rough decade, and I'm not trying to be flip here, but you had supply issues, you had credit issues, you had competition from single-family homes, and it took 10 years for all those negatives for their industry to run their course. Now we're back to zero, so to speak, and their traditional customer base is coming back. All you have to do is look at their rent rates, look at their occupancy, look at their same-store NOI - it's going up notch by notch by notch each quarter, and it's a very steady, defensive name. And the dividend yield is 8.7% - that's more than twice the REIT average - and it's covered by AFFO, which is just remarkable.
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