Zacks Investment Research
| Arden Realty |(ARI-NYSE) |
|Current Recommendation |Hold |
|Prior Recommendation |Sell |
|Date of Last Change |03/08/2004 |
| | |
|Current Price (03/09/06) |$45.53 |
|Six- Month Target Price | |
OUTLOOK
|Analyst must write |
SUMMARY DATA
|52-Week High |$47.12 |
|52-Week Low |$33.01 |
|One-Year Return (%) |33.02 |
|Beta |0.29 |
|Average Daily Volume (sh) |627,685 |
| | |
|Shares Outstanding (mil) |67 |
|Market Capitalization ($mil) |$3,065 |
|Short Interest Ratio (days) |1.07 |
|Institutional Ownership (%) |94 |
|Insider Ownership (%) |10 |
| | |
|Annual Cash Dividend |$2.02 |
|Dividend Yield (%) |4.44 |
| | |
|5-Yr. Historical Growth Rates | |
| Sales (%) |1.0 |
| Earnings Per Share (%) |-4.1 |
| Dividend (%) |0.6 |
| | |
|P/E using TTM EPS |18.9 |
|P/E using 2006 Estimate |18.0 |
|P/E using 2007 Estimate |17.1 |
| | |
|Zacks Rank |3 |
| | |
|Risk Level |Low |
|Type of Stock |Mid-Blend |
|Industry |Reit-Eqty Trust |
|Zacks Rank in Industry |55 of 130 |
KEY POINTS
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OVERVIEW
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INDUSTRY OUTLOOK
INDUSTRY OUTLOOK - NEUTRAL
Our outlook for the publicly traded real estate industry, comprised primarily of real estate investment
trusts (REITs), is neutral. The sector is at an interesting inflection point in its typical cycle. Operating
fundamentals have been declining over the past few years, but are finally beginning to stabilize. Cash
flow across the sectors has been depressed, but some companies are beginning to forecast growth over
the next year. Despite the weak operating environment, REIT share prices are at or just off all-time
highs, as historically low-interest rates have inflated FFO multiples well above past ranges. With access
to exceptionally cheap capital (most REITs can borrow at 5% or less) and relatively low cost of capital
(given high cash flow multiples being paid by investors), most REIT owners can buy low-growth, low cap
rate properties (defined as net operating income (NOI) yield on invested capital) and still make profitable
spreads. Given the low cap rate environment, most companies are taking the opportunity to prune their
portfolios and achieve extremely attractive pricing on dispositions, using proceeds in most cases to pay
down debt and strengthen balance sheets. With some companies' operating results still negative, a few
companies must sell assets to maintain their dividends, which we view as a fairly large negative when
evaluating the investment merits of individual companies, as financing a net deficit will put these
companies at a competitive disadvantage when external growth via acquisition becomes more attractive
(i.e., they will not have the available capital competing buyers will have). The confluence of low but rising
interest rates, high multiples, and negative to stabilizing operating results should make for a relatively flat
trading market for REIT shares. As interest rates rise, which we believe will continue for the foreseeable
future, we would expect multiples to contract (or, share prices will come down). However, with operating
results stabilizing, most REITs should be able to grow into inflated multiples over the next few years via
FFO expansion, leaving investors with a relatively flat outlook for share prices but overall positive returns
when including dividends, which currently yield about 5% over the sectors.
Some sectors are better positioned than others at this point in the cycle. With continuing strong
consumption in the U.S., retail REITs should continue to see favorable returns. Recent M&A activity
might suggest a near-term top in the mall REIT sector: Simon Property Group (SPG) recently announced
its intentions to acquire Chelsea Property Group (CPG), and General Growth Properties (GGP) closed its
previously announced acquisition of Rouse (RSE). We continue to believe that investors should see
near-term gains in strip-center REITs, with Developer's Diversified (DDR) and Federal Realty Trust
(FRT), in particular, showing continuing strength in operations, and relatively modest valuations.
We believe that in a rising interest rate environment, which implies improving economic growth for the
most part, real estate services companies should provide outstanding returns for investors. While asset
owners should see some contraction in multiples, any pick-up in economic activity generally helps
companies such as Jones Lang LaSalle (JLL), whose leasing and asset management services business
generally see increasing demand as the economy improves.
Mortgage REITs continue to demonstrate discipline in spread investing operations, and debt issuance
among most REITs continues to grow, giving companies in this sector ample opportunity for investment.
We believe most companies in this sector are fairly valued however, therefore shares may trade in a
range at this point.
We view the apartment and office/industrial sectors unfavorably for the most part. Most companies in
both sectors have yet to find an operating bottom, and as such, have not yet seen an uptick in operating
results. Apartment REITs, in particular, may be in a secular operating decline, with access to affordable
mortgage financing increasing for first-time and lower-income home buyers, who have historically been
the primary apartment renting demographic. For investors looking to invest in apartment REITs, we
believe the only place to put money to work is in companies located in markets where monthly rents are
measurably less expensive than a competing monthly mortgage payment (or where the housing
affordability index is relatively high). Office owners continue to see rent roll-downs (or lower market
rates) on expiring leases. In most markets, market rent rates are 10%-15% lower than existing lease
rates, which should continue to pressure office REIT cash flow in 2005. Importantly, both sectors are
struggling with dividend coverage, as most office and apartment REITs are running at negative free cash
flow after a few years of declining cash flow and must sell properties to help pay quarterly dividends.
On a valuation basis, most sectors are trading at the upper end of historical ranges, with apartment
REITs the highest among all sectors. On average, most REITs are trading at 12x-13x 2005 estimated
FFO, with an average dividend yield in the 5% range. Most REITs continue to trade at premiums to net
asset value (NAV), typically in the 110%-115% range, but some as high as 120% of NAV. Historically,
REITs have traded at slight premiums to NAV more in the 103%-106% range. Overall, we are
forecasting relatively flat FFO growth in 2005 overall, particularly as some of the heavier property sellers
see near-term NOI dilution, and resultant FFO declines, as a result of smaller portfolios without offsetting
acquisitions to maintain run-rates. In a six to 12 month timeframe, we believe investors should see about
5% total returns at this point, almost entirely derived of dividends.
INDUSTRY POSITION
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RECENT NEWS
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VALUATION
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RISKS
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INSIDER TRADING AND OWNERSHIP
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PROJECTED INCOME STATEMENT & BALANCE SHEET
HISTORICAL ZACKS RECOMMENDATIONS
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DISCLOSURES
The analysts contributing to this report do not hold any shares of ARI. Zacks EPS and revenue forecasts are not consensus forecasts. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Buy- Zacks expects that the subject company will outperform the broader U.S. equity market over the next one to two quarters. Hold- Zacks expects that the company will perform in line with the broader U.S. equity market over the next one to two quarters. Sell- Zacks expects the company will under perform the broader U.S. Equity market over the next one to two quarters. The current distribution of Zacks Ratings is as follows on the 1135 companies covered: Buy- 18.9%, Hold- 75.9%, Sell – 4.9%. Data is as of midnight on the business day immediately prior to this publication.
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Month Day, Year
[pic]Equity Research Greg Sukenik
155 North Wacker Drive Chicago, IL 60606
ZACKS ESTIMATES
Revenue
(in millions of $)
| |Q1 |Q2 |Q3 |Q4 |Year |
| |(Mar) |(Jun) |(Sep) |(Dec) |(Dec) |
|2004 |105 A |105 A |104 A |105 A |409 A |
|2005 |102 A |110 A |115 A |114 A |442 A |
|2006 |108 E |112 E |114 E |116 E |449 E |
|2007 | | | | | |
Earnings per Share
(EPS is operating earnings before non recurring items)
| |Q1 |Q2 |Q3 |Q4 |Year |
| |(Mar) |(Jun) |(Sep) |(Dec) |(Dec) |
|2004 |$0.65 A |$0.61 A |$0.64 A |$0.66 A |$2.55 A |
|2005 |$0.58 A |$0.62 A |$0.63 A |$0.58 A |$2.40 A |
|2006 |$0.62 E |$0.63 E |$0.63 E |$0.65 E |$2.54 E |
|2007 | | | | |$2.67 E |
|Zacks Projected EPS Growth Rate - Next 5 Years % |5 |
| | |
| Top 5 Public Companies in the industry |
| | | | |
|Ticker |Company |Market Share |Zacks |
| | | |Rec |
|HMT |Host Marriot Cp |6% |Buy |
|SPG |Simon Property |5% |Buy |
|GGP |Genl Grwth Ppty |5% |Hold |
|EOP |Equity Off Prpt |5% |Sell |
|VNO |Vornado Rlty Tr |4% |Hold |
| Arden Realty | |
|Income Statement and Balance Sheet | |
|(Dollars in millions, except EPS data) | |
| | | | | | | | | |
| |12/01 |12/02 |12/03 |12/04 |12/05 |12/06E |
|Sales | |419 |412 |414 |409 |442 |449 |
| |Cost of Goods Sold |123 |130 |133 |134 |149 |151 |
| |SG&A |12 |13 |18 |20 |34 |34 |
| |Other operating expenses |102 |110 |118 |122 |131 |134 |
| |Interest and other |77 |84 |93 |97 |105 |107 |
|Zacks Adjusted Income before NRI |98 |69 |46 |37 |69 |171 |
|Net Income |98 |70 |59 |74 |65 |171 |
|Diluted EPS before NRI |1.53 |1.07 |0.72 |0.56 |1.03 |2.54 |
|Reported EPS |1.53 |1.09 |0.92 |1.12 |0.98 |2.54 |
| | | | | | | |
|Cash & Marketable Securities |56 |25 |24 |28 |28 |28 |
|Current Assets |99 |47 |51 |65 |101 |101 |
|Current Liabilities |94 |108 |109 |117 |111 |111 |
|Long Term Debt |1,251 |1,402 |1,350 |1,326 |1,624 |1,624 |
|Shareholder's Equity |1,337 |1,247 |1,210 |1,196 |1,153 |1,324 |
Industry Comparables
| |Pr Chg |P/E CurrFY |EPS Gr |Price/ |Price/ |Price/ |
| |YTD | |5Yr Est |Book |Sales |CF |
|ARDEN REALTY |1.6 |17.8 |4.8 |2.6 |7.0 |14.8 |
| | | | | | | |
|Industry Mean |7.9 |15.0 |7.6 |3.2 |5.5 |19.1 |
|Industry Median |8.9 |14.4 |6.5 |2.0 |5.2 |14.3 |
|S&P 500 |1.9 |15.6 | |4.3 |2.7 |14.4 |
| | | | | | | |
|SL GREEN REALTY |21.9 |20.6 |7.5 |3.2 |8.9 |23.3 |
|HIGHWOODS PPTYS |15.6 |13.9 |3.1 |1.8 |3.8 |9.8 |
|PENN RE INV TR |9.9 |11.4 | |1.5 |3.5 |11.3 |
|FED RLTY INV |18.7 |21.6 |7.1 |5.9 |9.2 |21.7 |
| | | | | | | |
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