Hold-Rated AMB Leads REIT Sector
AMB Property Corporation (AMB) reported strong fourth quarter and full-year 2007 results: FFO [funds from operations] of $1.20 and $3.51 per share were up 19% and 13% respectively compared to the year-earlier periods. Overall operating results were good as occupancy is holding steady and the company continues to increase rents on new leases in most markets.
The company also has a growing development pipeline to fuel further growth. We continue to rate the shares a Hold due to a sector-leading valuation. The company is highly dependent on development sales to meet estimates. We expect commercial property valuations to trend downward, which will negatively affect profits on the company's development pipeline.
On a P/FFO basis, AMB is trading at an approximate 8% premium to industrial REITs [real estate investment trusts] and in-line with office REITs that we cover. Shares have somewhat recovered after a sell-off toward the end of last year. We are projecting 12% FFO growth in 2008, which would put the company slightly above its peer group.
Although, much of this growth is dependent on merchant building gains, which is more volatile than recurring rental income, and could fall off if cap rates rise as credit problems and a slumping economy are starting to bring down commercial real estate values. The company's core portfolio continues to perform well, and AMB is one of the two best industrial REITs in terms of asset quality that we cover, causing us to maintain our Hold rating. We are setting our six-month price target at 14x 2008 FFO estimates or $55 per share.
A Hold on Aventine Renewable
We maintain our Hold rating on Aventine Renewable (AVR) shares. AVR has favorable top-line growth prospects due to its ongoing capacity expansions through new plants in Nebraska and Indiana, recent bullishness on the energy bill for ethanol production, an ongoing share repurchase program, and high crude oil prices. These factors should help maintain the momentum of future growth.
However, the ethanol industry has very few barriers to entry, and producers are subject to corn, natural gas, and oil price fluctuations. Such price volatility impacted AVR's performance in the 4th quarter of 2007. The company was hit by sharply lower ethanol pricing and continued high corn costs.
Rapid ethanol supply growth continues while demand has been held back due to constraints in refineries infrastructure. Therefore, with a mixed outlook, we maintain a Hold recommendation on AVR. Given the conflicting valuation indicators for the company, yet with significant projected long-term earnings growth expectations coupled with the ongoing share repurchase program, we maintain our six-month target price of $5.50.
