BUY (AEC, $18.14)
Potential for increased payout ratio, and growing portfolio could result in a higher total return. Initiating With A BUY Rating and $22 Price Target
August 12, 2014
John R. Benda
Investment Conclusion. We are initiating coverage of Associated Estates Realty Corporation (AEC) with a BUY rating and $22 price target. On a multiple basis, AEC trades at a discount on Price / Funds From Operations (“P/FFO”) at 13.65x versus the universe average of 15.96x and at a discount on P/Net Asset Value (“P/NAV”) at 0.85x versus the universe average of 0.93x despite a conservative balance sheet. Solidly profitable operations, higher expected future earnings and increased FFO on our estimates indicates there is room to raise the dividend and drive total return. Our $22 price target implies an annual total return, including the current 4.2% dividend yield, of 25.6% at the current stock price of $18.14. In 2013 AEC covered its dividend through Funds From Operations (“FFO”) 1.67x, well above the industry median of 1.58x in 2013 and feel AEC could increase the dividend 5% - 10% providing additional upside for investors, all the while maintaining its investment grade credit rating and conservative balance sheet leverage ratios.
Source: Capital IQ, National Securities Corporation Estimates
Cheap on P/FFO and Cheap on NAV, Despite Strong Underlying Fundamentals. For the group, the average and median P/FFO on 2014 consensus estimates is 15.96x and 16.21x, respectively. For the group, the average and median P/NAV is 0.93x and 0.96x, respectively. AEC trades at a discount on both metrics, yet equity based metrics like ROE, 7.1% in 2013 and 7.3% in 2012, are above the industry median of 6.6% in 2013 and 7.1% in 2012. Further, AEC's NOI yield of 61.5% in 2012 and 62.3% in 2013 is....
This publication does not constitute and should not be construed as an offer or the solicitation of any transaction to buy or sell any securities or any instruments or any derivatives of the securities mentioned herein, or to participate in any particular trading strategies. Although the information contained herein has been obtained from recognized services, and sources believed to be reliable, its accuracy or completeness cannot be guaranteed. Opinions, estimates or projections expressed in this report may make assumptions regarding economic, industry, company and political considerations, and constitute current opinions, at the time of issuance, which are subject to change without notice.
This report is being furnished for informational purposes only, and on the condition that it will not form a primary basis for any investment decision. Any recommendation(s) contained in this report is/are not intended to be, nor should it / they construed or inferred to be, investment advice, as such investments may not be suitable for all investors. When preparing this report, no consideration to one’s investment objectives, risk tolerance and other individual factors was given; as such, as with all investments, purchase or sale of any securities mentioned herein may not be suitable for all investors. By virtue of this publication, neither the Firm nor any of its employees shall be responsible for any investment decisions. Before committing funds to ANY investment, an investor should seek professional advice. Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice, or to be used by anyone to provide tax advice. Investors are urged to consult an independent tax professional for advice concerning their particular circumstances. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, either expressed or implied, is made regarding future performance.
National Securities Corporation (NSC) and its affiliated companies, shareholders, officers, directors and / or employees (including persons involved with the preparation or issuance of this report) may, from time to time, have long or short positions in, and buy or sell the securities or derivatives (including options) thereof, of the companies mentioned herein. One or more directors, officers, and / or employees of NSC and its affiliated companies, or independent contractors affiliated with NSC may be a director of the issuer of the securities mentioned herein. NSC and / or its affiliated companies may have managed or co-managed a public offering of, or acted as initial purchaser or placement agent for a private placement of any of the securities of any issuer mentioned in this report within the last three (3) years, or may, from time to time, perform investment banking or other services for, or solicit investment banking business from any company mentioned in this report.
This research may be distributed by affiliated entities of National Securities Corporation (NSC). Affiliated entities of NSC may include, but are not limited to, vFinance Investments, Inc., National Asset Management and other subsidiaries of our parent company, National Holdings Corporation.
The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and the income they produce if any, may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors. Furthermore, NSC may follow emerging growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. This report does not take into account the particular investment objectives, financial situation or needs of individual investors. Before acting on any advice or recommendation in this material, the investor should exercise independent judgment as to whether it is suitable in light of his/her particular circumstances and, if necessary, seek professional advice. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance.
Additional information relative to securities, other financial products, or issuers discussed in this report is available upon request. Neither this entire report, nor any part thereof, may be reproduced, copied or duplicated in any form or by any means without the prior written consent of National Securities Corporation. All rights reserved. NSC is a member of both the Financial Industry Regulatory Authority (FINRA) and the Securities Investors Protection Corporation (SIPC).
For disclosures inquiries, please call us at 1-800-417-8000 and ask for your NSC representative, or write us at National Securities Corporation, Attn. Supervision Department, 410 Park Avenue, 14th Floor, New York, NY 10022, or visit our website at www.nationalsecurities.com