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J.D. Thornton

CLP AT A GLANCE

P/E ► -5.77   EV/EBITDA ► 379 VERY HIGH ROA ► 0.7% AVG ROE ► -5.5% AVG Debt to Equity ► 1.95 AVG Interest Coverage Ratio ► 9.58 HIGH

 

 

 

 

 

 

Colonial Properties Trust is a real estate investment trust that purchases and develops properties throughout the Sunbelt states, primarily North Carolina, Texas, Alabama, Georgia, and Florida. CLP manages 39,104 apartment units, 12.1 million sq.ft. of retail space, and 17.6 million sq.ft. of office space.^[1] The company invests in three types of real estate - office, retail, and multifamily residential housing. However, it is planning to sell off commercial and retail interests while acquiring more residential properties so that 80% of its revenues will come from residential, multifamily housing by 2010.

This growth strategy presents risks for CLP, as it is betting on continued economic and demographic growth in these regions as more Americans migrate southward. While this area is quickly growing, it is also a fiercely competitive real estate market, as cheaper real estate costs mean low barriers to entry for competitors to CLP. Another risk in CLP's new strategy is that while its residential real estate profit margins are higher than those of its competitors, they have been the lowest of the firm's three divisions in the last two years. Concentrating more heavily on this low-margin sector means the firm will have to cut costs in other areas.

The firm's decision to focus on multifamily residential apartments has come at the right time, due to the depressed state of the U.S. Housing Market. The Subprime lending crisis has made it harder for many individuals to receive the loans necessary to purchase a homes, making the rental properties that CLP develops more attractive options for both families and investors. Since CLP also earns revenue through joint-ventures where it continues to manage properties after selling them to another party, the firm profits from additional rent revenues as well as property sales when the rental market is hot.

Business Overview

By the end of 2007, CLP reorganized its property portfolio so that 75% of its income came from multi-family assets. It sold nearly $2 billion in assets to complete this transition, using the capital to pay out its required dividends and to fund its extensive development projects.

Many of CLP's multi-family properties also have commercial and retail components. A large part of this residential portfolio is managed under two brand names: Colonial Grand and Colonial Village (henceforth abbreviated at CG and CV respectively). 85% of CLP's square footage is located in the Sunbelt states of Alabama, Florida, Georgia, Texas, and North Carolina.

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Property Acquisition and Development

CLP focuses on development as it believes this is more profitable than simply buying and reselling properties. CLP seeks to distinguish the reputation of its brand name properties. This has resulted in 27 building awards for CLP in the past decade.^[4] The following charts indicate the future of CLP's development and acquisition.

CLP Current Development Pipeline

CLP acquisitions 2007

Trends and Forces

• The liquidity crunch resulting from the Subprime lending crisis could inhibit CLP's ability to finance expansion. Lending is especially important to Real Estate Investment Trusts since Federal Tax law requires that they return at least 90% of earnings to their shareholders. As a result, they cannot simply finance expansion by retaining a larger portion of their earnings and they must borrow this money instead. CLP has responded to the liquidity crunch in traditional means by reducing overhead costs, expanding more cautiously, and organizing an extended line of credit with a number of financial institutions. However, CLP has also sought to reduce its debt load by selling off portions of its developments to joint ventures organized with other investors, while still maintaining its position as managers of these properties. This has proved an effective strategy for CLP as it has allowed them to expand their brand name properties aggressively within a reasonable debt-load and while retaining the profits from property management. CLP's two biggest joint venture partners are UBS AG (UBS) Wealth Management and DRA Advisors, which together own 60% of the space managed by CLP. Furthermore, CLP claims that it can fund its current planned development pipeline without accessing capital markets.^[7]

• The subprime crisis could also help CLP, boosting demand for its multi-family rental units. For the fourth quarter of 2007, 19.2% of individuals who moved out of CLP's properties were leaving to move into a purchased home. This was the lowest level of move-outs due to new home ownership since 2005. At the same time, CLP worries that a glut of homes on the market might reduce prices sufficiently to attract many renters to purchase homes. This phenomenon has only effected the company's operations in Phoenix and Orlando, where over-construction was severe. In other locations, only the largest apartments with three bedrooms directly compete with houses, and this is only a small portion of CLP's apartment holdings.^[8]

• Demographic and Economic Trends favor CLP's properties in the Sunbelt. CLP's management believes that population and job growth in the Sunbelt states will continue to out-pace the national average. They claim that recently 60% of the new jobs created in the United States were located in the Sunbelt. Furthermore, baby boomer retirees from northern states are expected to continue their southern migration, feeding demand for residential housing. CLP's current development pipeline (illustrated above) shows that much of CLP's planned expansion is in top quartile growth cities such as Charlotte, Austin, and Phoenix.^[9]

• CLP's joint-venture strategy requires ongoing demand from investors. To access capital for building, CLP routinely sells off its developments after completion while continuing to manage and operate the property. If investors believe residential real estate to be a poor investment, a likely scenario considering current market conditions, then CLP will be unable to free up sufficient capital to continue its most profitable activity: development.

Competition

Of the four multi-family REITS with a national presence considered below, CLP is the smallest and least diversified geographically. However, due to its use of joint ventures it maintained a lower debt load than many of its competitors. Furthermore, most CLP properties include amenities such as swimming pools, 24-hour exercise facilities, jacuzzis, clubhouses, and tennis courts.^[10] Unlike its competitors CLP places a unique emphasis on building mixed-use developments (which include residential, retail, and office space within the same property) and has developed strong relationships with retailers such as Target (TGT), AnnTaylor Stores (ANN), Regal Entertainment Group (RGC), and Williams-Sonoma (WSM).^[11] This is important as it serves to distinguish CLP's Colonial Village and Colonial Grand brands from the properties of its competitors.

References

1. ↑ CLP Company Website
2. ↑ CLP 2007 10-K, pg. 56
3. ↑ CLP 2007 10-K, pg. 10
4. ↑ CLP 2007 10-K, pg. 4
5. ↑ CLP's Fourth Quarter 2007 Report, page 19
6. ↑ CLP's Fourth Quarter 2007 Report, page 21
7. ↑ CLP's 2007 Q4 Earnings Call
8. ↑ CLP's 2007 Q4 Earnings Call
9. ↑ CLP 2007 10-K, pg. 4
10. ↑ CLP 2007 10-K, pg. 34
11. ↑ CLP 2007 10-K, pg. 7
12. ↑ Financial data from yahoofinance.