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Trade Street Residential, Inc - Initiation Note

Trade Street Residential, Inc.

Neutral (TSRE, $6.95)

Don’t Buy Just Yet - One Quarter Does Not a Trend Make. Initiating With A NEUTRAL Rating and $7.00 Price Target

September 8, 2014

John R. Benda


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Investment Conclusion. We are initiating coverage of Trade Street Residential, Inc. with a $7.00 price target and NEUTRAL rating with a cautious outlook as we did with Post Properties, Inc. (PPS–NEUTRAL, $55.53). Since completing its IPO nary a year ago, TSRE’s path has been much different than that of Independence Realty Trust’s (IRT–BUY, $10.03). Since its IPO, TSRE has had significant executive level management turnover, has only recently in 2Q14 posted its first quarter of positive funds from operations (“FFO”), and is not covering its dividend or interest payments through FFO. We feel FFO dividend coverage will occur in early 2015 for TSRE, an issue that could continue to weigh on the shares. Since its IPO in May 2013, TSRE priced a secondary 36.7% below its IPO price just 8 months later, an alarming fact for initial investors despite 40.7% portfolio growth. Essentially, we believe TSRE has the portfolio size to be profitable but has stumbled along the way and has much work to do to turn its effort around. Our $7.00 price target implies an annual total return, including the current 5.5% dividend yield, of 6.3% at TSRE’s current stock price of $6.95.

TSRESource: Capital IQ, Company reports, National Securities Corporation Estimates

Portfolio Growth a Bright Spot Amidst Negatives. Since its IPO in 2Q13 to its recently reported second quarter results, TSRE has posted an apartment unit growth figure of 65.1%, adding 2,072 units to its May 2013 IPO portfolio of 3,183 units. The additional 2,072 units are the result of two key purchases, 878 units acquired from the proceeds of TSRE’s IPO and 1,010 of which were acquired from proceeds of its January 2014 $150 mln secondary offering. When investors look to analyze Y/Y unit growth at the end of 2014, TSREs robust growth statistics will help detract from the negatives and redirect investors focus to the positives that should help drive future growth.

Internally Managed Structure Favorable to Growth. Whereas other multifamily rental REITs of its size are wrought with fees paid to external managers, TSRE distinguishes itself by that fact that it is internally managed, an important selling point. Coverage competitors Preferred Apartment Communities Inc. (APTS–BUY, $8.73),...

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