Colonial Properties Trust (NYSE:CLP)

CAPS Rating: 4 out of 5

The Company owns, develops and operates multifamily, office and retail properties primarily in the Sunbelt region of the United States.

Recs

9
Player Avatar AllStarPortfolio (20.05) Submitted: 6/19/2009 6:34:40 PM : Outperform Start Price: $6.85 CLP Score: +30.41

On June 18, 2009 at 5:34 PM, TigerPack (99.98) wrote:

3 to 5 Year, Long-Term Pick

Colonial Properties (CLP) is a medium-sized Real Estate Investment Trust (REIT) based in Alabama. It has fallen hard from around $50 a share in 2007, with the real estate bust and deep recession in the U.S. Still, around $7 per share investors are buying solid annual cash flows of $1.50-$2.00 per share that are available to owners as dividends or reinvestment, even during an extremely slow spot for the economy and real estate markets. The company is slated to pay around $0.60 in dividends the next 12 months, which works out to better than an 8% yield for owners. The liquidation value of the company’s properties is likely well north of $7 per share, with “older” holdings of real estate at cost providing a net book value of $20 a share currently.

For investors looking for a high margin of safety (Ben Graham followers), Colonial along with nearly every REIT in the U.S. provides a great risk-adjusted entry point today. I believe the actual bankruptcy or default risk of owning a long-standing REIT product is much smaller than the “implied” risk of holding this business group, as investor psychology is incredibly numb and bearish on the sector after a multi-year bust. Already many REITs have raised equity or closed new financing agreements (like CLP) during the first half of 2009 to provide extra capital to survive the next year or two of projected economic sluggishness.

I love stocks that have been beaten down in price over several years, especially from a variety of reasons that are not entirely company specific. They have turned into some of my best long-term buy and hold investments. Colonial has suffered four hits to its stock price and business health not completely under management’s control, including a monster real estate bust, an evaporation in credit for commercial real estate loans, the worst bear stock market in modern history for all publicly-owned businesses, and slack demand for rents with the recession in economic activity.

Management has been heavy buyers in the stock the last six months, on dips in the price under $7 to as low as $3 per share, and “insiders” own a considerable amount of stock around 12% of the outstanding shares. [The company’s board of directors scores highly on third-party corporate governance comparisons.] Another 30% of the company is held by REIT index mutual funds and ETFs that will not be selling shares any time soon. In fact, the index funds will be large net buyers in the future as all REITs see renewed investor interest in the coming years from rising rates of inflation. At last glance over 11% of the company was sold short, and this number will add short covering (buyers) to the stock in the future as the credit crunch dissipates, the stock market zig-zags higher, the economy improves somewhat and inflation returns in 2010-2011.

The catalysts for recovery in REIT stock pricing will occur in three phases. The first is already underway – reflation of the fractured banking and credit system. Since February real improvements in commercial real estate activity and loan rates have been taking place. The Federal Reserve and foreign central banks have finally provided enough liquidity to the financial system to encourage more confidence and a large rally in the general level of stock pricing globally. As a consequence of these improvements, REITs have now regained access to the equity and credit markets to raise capital and finance/refinance loans at somewhat normal rates of interest. With the reflation effort, REITs should rise (and have risen) in value off their close to bankruptcy valuations by Wall Street. The prospect of recovery in the overall economy should also reflate REIT stock prices, as rental income remains or grows instead of disappearing during the recession.

The second phase will start in 2010 as investors get serious about factoring in the rising rates of inflation that will surely result from all the money creation in 2008-2009. Investors will shift their investment focus from the conservation of capital in the bear market to taking on greater risk, and finding ways to hedge against inflation with their money. Why not own Colonial (or another REIT) that is levered to real estate assets, which will raise rents over time with the inflation, while their cost structure (debt payments) remain relatively stagnant? Getting a high dividend payment yearly, in addition to the potential of substantial capital gains in a rising real estate price environment provides a win-win investment decision few other sectors can match.

The third catalyst for REIT ownership revolves around the possibility of hyperinflation in the U.S., or dramatic rates of inflation after 2010. The odds of such a scenario seem to be growing in investor minds of late. I have argued the last several months, that out-of-favor, dirt cheap REITs will generate much better long-term, total returns for investors than the over-hyped, over-owned and over-priced precious metals investments of gold and silver currently. If I own a leveraged piece of real estate that doubles or triples in resale value quickly, that is using debt to equity of 2 to 1, 3 to 1 or greater BEFORE the increase in prices, my ownership equity stake will see outsized gains vs. the rise in general prices on goods and services. As an inflation hedge, REITs may be the BEST risk-adjusted game in town for investors looking to buy stocks, and Colonial (CLP) is in excellent shape to be one of the big winners in this sector the next 3-5 years.

-TigerPack

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Member Avatar kaskoosek (37.09) Submitted: 7/8/2009 10:05:01 AM
Recs: 0

Tiger

I can not recommend you enough for this.

Good job.

However I feel that in a hyper inflationary scare rents are not going to be aligned with real estate prices.
Nevertheless a great buy, though still risky if inflation takes more time.

Member Avatar bucheron (84.21) Submitted: 3/3/2010 4:10:34 AM
Recs: 0

This is good stuff

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