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Associated Estates Realty Corporation - Initiation Note

Associated Estates Realty Corporation

BUY (AEC, $18.14)

Potential for increased payout ratio, and growing portfolio could result in a higher total return. Initiating With A BUY Rating and $22 Price Target

August 12, 2014

John R. Benda


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Investment Conclusion. We are initiating coverage of Associated Estates Realty Corporation (AEC) with a BUY rating and $22 price target. On a multiple basis, AEC trades at a discount on Price / Funds From Operations (“P/FFO”) at 13.65x versus the universe average of 15.96x and at a discount on P/Net Asset Value (“P/NAV”) at 0.85x versus the universe average of 0.93x despite a conservative balance sheet. Solidly profitable operations, higher expected future earnings and increased FFO on our estimates indicates there is room to raise the dividend and drive total return. Our $22 price target implies an annual total return, including the current 4.2% dividend yield, of 25.6% at the current stock price of $18.14. In 2013 AEC covered its dividend through Funds From Operations (“FFO”) 1.67x, well above the industry median of 1.58x in 2013 and feel AEC could increase the dividend 5% - 10% providing additional upside for investors, all the while maintaining its investment grade credit rating and conservative balance sheet leverage ratios.

Source: Capital IQ, National Securities Corporation Estimates

Cheap on P/FFO and Cheap on NAV, Despite Strong Underlying Fundamentals. For the group, the average and median P/FFO on 2014 consensus estimates is 15.96x and 16.21x, respectively. For the group, the average and median P/NAV is 0.93x and 0.96x, respectively. AEC trades at a discount on both metrics, yet equity based metrics like ROE, 7.1% in 2013 and 7.3% in 2012, are above the industry median of 6.6% in 2013 and 7.1% in 2012. Further, AEC's NOI yield of 61.5% in 2012 and 62.3% in 2013 is....

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