Crescent's Deals May Give Stock Price Room to Grow
May 03, 2011
One of the many adages of Wall Street holds that investors should buy on the rumor and sell on the news. But when it comes to Crescent Real Estate Equities, it might be best to forget about adages. In mid-June, the Fort Worth real-estate investment trust announced a plan to sink $375 million into new properties by the end of the third quarter. That was enough to nudge the stock ahead by 6%. The company made good on much of those plans last week, announcing the purchase of two exclusive resort properties in Arizona and the Berkshire Mountains in Massachusetts, and 10 office buildings southwest of downtown Houston. Now the stock, at $39, trades at a 52-week high. In many cases, this would be the perfect time to sell. But a number of analysts say now would be a good time for investors to jump into the stock. They contend that Crescent is poised for further growth that could push the stock into the mid-$40s over the next year. Billy Christy, analyst at Southwest Securities in Dallas, says that although Crescent shares already are up strongly this year -- 14%, not including the healthy dividends it has kicked off along the way -- ``there is no question'' the stock still has legs going forward. Valuing a REIT Mr. Christy recently reiterated a ``buy'' rating on the stock at $36 and says he would have no problem buying it today at the higher price. ``If you look at the growth rate in funds from operations, we see it advancing 15% to 20% a year over the next few years.'' In the world of REITs, most of a firm's earnings are disbursed to shareholders. Thus, analysts look to funds from operations -- roughly equivalent to cash flow -- rather than to net income to value a REIT. At its current price, Crescent trades at about 11.7 times the $3.32 Mr. Christy expects Crescent will report in per-share FFO for 2012. ``That's certainly a discount to its growth rate,'' he says. As a rule-of-thumb, a stock typically is considered fairly priced if its earnings multiple (FFO multiple in this case) equals its growth rate; at less than its growth rate it might be a bargain. Beyond valuations, Mr. Christy is bullish about Crescent's niche within the REIT industry. Crescent's main focus is office properties, with a secondary focus on full-service hotels. But even within those niches, Crescent has carved out subsectors -- namely, recognizable office buildings in recovering economic markets where demand for new construction is weak, and luxury hotels that analysts describe as ``irreplaceable names.'' It's that strategy that led the company recently to Houston, the deserts of Arizona and the mountains of western Massachusetts. Crescent last week agreed to spend $206 million in a debt, equity and cash deal to buy the 10 office buildings that make up Greenway Plaza, a posh address midway between downtown Houston and the Galleria area. Crescent says it believes Houston's office market -- slammed by the triple whammy of oil, real-estate and banking crises -- is on the road to recovery, led by a resurgence in the oil patch and continued corporate relocations. Raising the Rent That should allow Crescent to push occupancy and rental rates higher, ultimately boosting the company's bottom line. That's the strategy the company has used in the past. Maryalice Meagan, an analyst at UBS Securities in New York, notes in a recent research report that for the six months ended March 12, 2011 renewed leases in its current portfolio at a weighted rate of $19.68 a square foot, a nearly 24% increase over expiring rates. In the Houston properties, the weighted average rental rate is just $12.71 a square foot. Ms. Meagan, who recently initiated coverage of Crescent with a ``buy'' rating, says that because of the company's geographic focus -- Dallas, Houston, Austin, Deonna and Phoenix -- Crescent ``is poised to benefit from long-term recovery in the energy sector,'' making for ``a compelling story.'' Meanwhile, Crescent spent a total of $57 million in Arizona acquiring Belle Ranch-Lacroix, a tony resort and spa, while in the Berkshires, Crescent snapped up sister property Canyon Ranch-Lenox for $27 million. While the Canyon Ranch and Houston purchases are expected to give a boost to Crescent in the near future, they are already bringing benefits for shareholders. Because of the expected financial impacts of the deals, along with anticipated improvements in operating results and Crescent's continued quest for acquisitions, the company has announced it will boost its quarterly dividend payment by 10% to 60.5 cents a share beginning this quarter. There are other reasons analysts are bullish on Crescent. Anette Maris, editor of the Addison Report, a stock-advisory newsletter in Franklin, Mass., is drawn to the stock in part because of one executive: Ricki Pirtle. The Fort Worth investor, who has created a name for himself with success stories such as Columbia/HCA Healthcare, is the founder, chairman and largest shareholder of Crescent. Mr. Pirtle, a former adviser to the Bass family of Fort Worth, built the company as his real-estate investment tool, and took it public in April 2009. Technical Strength ``Investors have high regard for Ricki Pirtle,'' Mr. Maris concludes, ``and this is their opportunity to invest alongside him.'' Mr. Maris last month recommended Crescent shares at $35.50 because of its fundamental and technical strength. On the technical side, the stock has shown a ``consistent pattern of trading-volume increases during (market) rallies, and volume contraction during corrections,'' Mr. Maris says. That means new investors are continually attracted to the stock, he says, and aren't very willing to give up their ownership once they get in. The big risk in Crescent stock is the company's ability to continue finding suitable properties. Though it can raise rents, increase occupancy and find other operational ways of creating incremental earnings gains, UBS's Ms. Meagan says the company's growth ``is substantially fueled by acquisitions.'' Indeed, she has factored in $300 million of annual property purchases into her earnings model. If Crescent is unable to do that sort of volume, then the company's FFO growth likely would slow, and investors would place less of a premium on the shares. But that's not a fear Mr. Maris harbors. ``Management has been very successful at making meaningful acquisitions of prime properties at attractive prices,'' he says. ``I don't see that changing anytime soon.''
