Why Are AmREIT Shares Up Over 30% This Summer?

AmREIT AMRE is a relative newcomer to the neighborhood and specialty retail center space.

This sector as a whole has returned an impressive 16.6 percent year-to-date according to the latest MLV & Co research report dated August 25, 2014, compared to around eight percent for the S&P 500.

In the spirit of full disclosure, AmREIT shares have returned a little over 43 percent YTD, so this is not just cherry picking the summer months.

While plenty of San Antonio, Texas River Walk tourists might be looking to cool off and sip a cold drink at the scenic South Bank property below, it is just one of example of the many high-end AmREIT properties that are situated in four fast growing urban areas in Texas, as well as locations in the metro-Atlanta market.

One Version Of The AmREIT Recipe For Success

Start with superbly located retail properties in five markets which feature outstanding demographics and household incomes; combine that with experienced management; add two parts operational and redevelopment expertise; shake with high occupancy, and serve over a solid balance sheet. Garnish with quarterly dividends.

This Recipe Attracted A Cash Buyer

The spike in the chart below, coincides with $5.25 billion market cap Regency Centers REG $22 per share offer to purchase AmREIT outright. This offer was rebuffed by the AmREIT board of directors on July 29, 2014.

A subsequent Benzinga article highlighted the reasons why MLV & Co. analyst Paul Morgan raised the price target on $465 million cap AmREIT from $24 to $25 per share, on August 11, 2014.

Federal Realty FRT has proven to REIT investors over decades, that upscale life-style centers, and/or mixed use redevelopment in areas surrounded by high income households is a sustainable business model. As recently reported by Zacks Research, Federal Realty raised its outlook for full-year 2014 FFO per share to the range of $4.90 – $4.94, from $4.86 – $4.93 guided earlier.

Related Link: The Sun Never Sets On Blackstone Group LP

Federal Realty has paid quarterly dividends to its shareholders continuously since its founding in 1962, and has increased its dividend rate for 47 consecutive years, the longest record in the REIT industry. This "bullet-proof" dividend is currently yielding 3.12 percent for shareholders of this $8.4 billion dollar market cap REIT.

Here Is AmREIT's Version Of This Winning Game Plan

It all starts and ends with purchasing power and high-density of households:

Joint ventures with some of Wall Street's biggest investment banks allows small-cap AmREIT to take on institutional quality projects that are much larger than you would expect.

These ventures also serve as sources of fee income, as well as a clearly visible pipeline for future growth:

Industry leading demographics drives higher base rents:

These higher rents, in combination with a very low weighted average cost of capital for a small-cap REIT, (as evidenced by the chart below and the current 3.4 percent yield on common equity):

Produces a high projected compound annual growth rate compared to industry peers:

In a nutshell, this is the game-plan that AmREIT has followed since its IPO in September 2012.

AmREIT Valuation Metrics No Longer Signal A Bargain:

• An implied cap rate of 5.7 percent
• An estimated NAV, or net asset value, of $24 per share, compared to closing price of $23.50 on August 25, 2014
• AmREIT is currently trading at 22.9x 2014E FFO and 20.7x 2015E FFO per share

Metrics are from MLV & Co. Investment Research for the week ending August 22, 2014. MLV & Co. maintains a Buy rating on AmREIT with a revised price target of $25 per share.

Investor Takeaway

AmREIT appears to be a well-managed REIT, with an attractive portfolio of assets and a clearly defined strategy for long-term success.

The company appears to be successfully executing a strategy of acquiring strategically located commercial assets in five key markets, as well as adding value through land development and redevelopment opportunities.

As a result of the 30 percent gains in the stock this summer -- which were triggered by the Regency Centers $22 per share buyout offer -- AmREIT appears to be close to fully valued at this time, based upon its price to FFO, and NAV metrics.