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Subject:  Re: AREEP: Good Yield + Call Option (REITnut rev Date:  9/8/2015  8:59 AM
Author:  investor133 Number:  78809 of 86863

I spent yesterday couple of hours reading through the transcript of recent quarterly report, Seeking Alpha articles and the news releases of ARE.

Obviously anyone reading about ARE will observe immediately that the portfolio holdings are very high quality - around 80% or so concentrated in highly supply constrained markets including Greater Boston, San Francisco, San Antonio and then New York even though the life sciences type businesses are less common in NY than the first three locations.

The rise in FFO, FFO/share, revenue clearly indicates the strength of the company. It did $204 million/ in revenue this last quarter compared to 176 a year before. More importantly it was done without issuing new shares so the FFO per share was $1.31 vs. $1.19. Considering that terms are around 8-9 years on the average for each of remaining leases, these growths are impressive as the rent is not setting that frequently (as opposed to Apartment REIT or self storage or hotel rates). The growth and predictability of the cash flow is a real strength going forward in my opinion.

Management went crazy in the conference call to highlight the recent sale of around $190 million (70% interest) for a Boston property with 4.5% cap rate. They kept talking about it as if the whole portfolio should be valued at the same rate. It really drove me nuts - I get that it fetched good price but boy it leaves you wondering whether management is really well grounded or they out there just trying to upsell the business to its shareholder constituency.

The FFO projected is around 5.2 to 5.4/share this year. With shares selling at $84, at midpoint it is selling for 16 times FFO. For a company with majority leases being triple net lease, I would think the FFO and AFFO would not be that far part but I have got no clue what the AFFO is like for this company.

The company also acts a venture capital firm. It has around $170 million in unreliazed gain on the investment in Bio tech companies. When working with clients, if it finds attractive, it invests in the company. When pointed by one of the analysts that right now would be a good time to sell, the managemetn indicated that they do monetize it steadily (the guidance has $4 million year/gain built into it) but then they also think if one of the company turns into Biogen or Celgene, they could hit a home run. I really don't know what to think about it. Venture capital and real estate businesses require different skills, so at first sight it is not so great a sign. But then the kind of gain they have tells you the guys may be know more than we think they do. Overall despite my first inclination I don't want to think management is throwing darts around and see what sticks. So in my eyes it is net neutral - yes despite the steller performance of the investment portfolio.

The debt makes me really really uncomfortable. Sitting at $4B, it is around 7.4 times EBITDA. That is huge huge. For a company that is going to generate less than $1B in revenue, $4B of debt seems out of whack. From a total market cap perspective, it is probably inline with others? The proceeds from the recent sale and other disposition will be used to bring the debt down but still it looks high. May be for a triple net lease company with such predictable and growing cash flow, it is not a big deal, so looking for insight from others. I looked at companies in the Apartment sector, their debt level compared to revenue is nowhere close to this.

The rents they have in contract has automatic escalation built in. So that is really really good. I guess it comes with being in the AAA market.

The company does provide lot of detailed information in its quarterly report. The occupancy currently sits just below 96%. I would think that with the markets the company is in, it would be little higher but not sure what to make of it. They do have some vacancy that is working through the system, but still ...

Any way, would like to see what others have found interesting about the company.

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