Creative Management Contributes To Buy-Rating On Essex Property Trust (ESS), Says Senior 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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Alexander D. Goldfarb is an Associate Director and the Senior REIT Analyst in the research department of Sandler O'Neill + Partners, L.P. Mr. Goldfarb joined the firm in 2009 following two years as a Director and Senior REIT Analyst at UBS and five years at Lehman Brothers, where he was a Vice President and REIT Analyst. Mr. Goldfarb has covered the major property types and appeared on television (CNBC) and in print media, including The Wall Street Journal, Barron's, BusinessWeek, Bloomberg and Forbes. Mr. Goldfarb holds an MBA from the F.W. Olin Graduate School of Business at Babson College and a Bachelor of Arts from Wheaton College.
TWST: What are some of your favorite names in the multifamily space?
Mr. Goldfarb: Our three "buy"-rated stocks are Colonial (CLP), Equity Residential (EQR) and Essex (ESS).
TWST: What makes them stand out?
Mr. Goldfarb: EQR is a national company, though they tend to focus on the coasts. They are very efficient, good operators. They were early to make acquisitions and restart their redevelopment program, and that's proved huge. At the beginning of the year, they paid a 5.5% cap rate for three Macklowe towers in New York. At the time, we wrote that we liked the trade - it was a great trade - and since it's only proved even better as Manhattan rents have increased. They started redeveloping some of their Miami properties last year, when the world was still nervous about the future; they already relaunched, selectively, their redevelopment program. It wasn't big, but they were doing small things that allowed them to raise rents maybe $25, $50, and it is working. So those are some of the things that they've done, and I think it has really helped them.
Colonial is a turnaround play. It's a Sunbelt operator. They got themselves into trouble during the bull market, and over the past two years, they've done a good job of unwinding that. Their balance sheet - they have no real material maturities until 2012, so they're good on that front. And they also are good operators, and they have a good value proposition; their product is more in the outskirts of towns, and the product they offer is an "A" product but at an affordable price. They offer a very good value proposition, and their stock is cheap relative to peers. Because of these turnaround issues and legacy, you get penalized and it takes a while for that to wear off. But what you get by buying the stock is a good operator. They are turning around, they are doing the right things and the valuation is attractive.
Finally, Essex is a West Coast company, coastal California and Seattle, just very smart management team. They focus on owning the best real estate. It may not be the prettiest, but they own the best. And again, they were early on doing the acquisitions, and they have been consistent in underpromising and overdelivering. They have a very creative management team that actively runs the company and creates real value for shareholders.
TWST: I guess the stepchildren in this market right now are suburban office and industrial. Will that turn soon?
Mr. Goldfarb: We cover two industrial companies, and one is also suburban office. We cover Liberty (LRY) and EastGroup (EGP), and we actually have "buys" on both of those companies, and the reason is rather simple: Both companies are pretty prudent. In industrial, just like in shopping centers, DDR is one example, Kimco (KIM) is another example, there were companies that did a lot during the bull market as far as developments, expansion and joint ventures, and a lot of things that ended up causing pain later on. But you have Liberty and EastGroup that didn't do any of that, and therefore they weren't under pressure to recapitalize. Yes, Liberty cut their dividend. But if you look at them relative to others, they never stressed the company or balance sheet like some of their peers.The other one is EastGroup. EastGroup never raised equity, they didn't cut the dividend, and EastGroup is probably one of the few REITs that literally was essentially unaffected by the credit crisis except for the fact that obviously they've lost tenants and occupancy rates went down. But as far as their balance sheet, it didn't affect them. They are a very conservative company; they are very straightforward on their business model, and they never wavered, and that's served them well.
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