Estimates continue to climb for Home Properties, Inc. (HME) as the apartment REIT benefits from rising rents and higher occupancy rates.
With credit harder to come by and home prices plummeting, more families are choosing to rent rather than buy. This means higher demand for rental housing, which is driving higher occupancy rates and higher rents across much of the apartment REIT industry.
Home Properties offer investors attractive growth potential as well as a dividend that yields a hefty 4.1%. It is a Zacks #2 Rank (Buy) stock.
Company Description
Home Properties, Inc. is an apartment REIT with properties primarily in selected Northeast and Mid-Atlantic markets. The company owns and operates 116 communities containing 38,972 apartment units.
It is headquartered in Rochester, New York and has a market cap of $2.4 billion.
First Quarter Results
On May 5, Home Properties reported first quarter 2011 funds from operations (FFO) of 86 cents per share, beating the Zacks Consensus Estimate of 81 cents. It was a 22% increase over the same quarter in 2010.
Same-store net operating income rose 8.8% year-over-year as average monthly rental rates increased 2.2% to $1,151. Physical occupance rates were also higher, rising from 94.8% to 95.3%.
Meanwhile, operating income surged 135% as the company leveraged its fixed expenses.
Outlook
Management raised the midpoint of its guidance for 2011 following solid Q1 results. The company expects FFO between $3.37 and $3.49, up from the previous range of $3.30 to $3.46.
Analysts revised their estimates higher off the strong quarter as well. This has been the trend over the last several months as HME has delivered 5 consecutive earnings beats:
It is a Zacks #2 Rank (Buy) stock.
Based on consensus estimates, analysts are projecting solid earnings growth over the next two years. The 2011 Zacks Consensus Estimate is $3.46, representing 12% growth over 2010 EPS. The 2012 consensus estimate currently stands at $3.76, corresponding to 9% EPS growth.
Dividend
Being a REIT, Home Properties pays out the majority of its taxable income through dividends. It currently yields an attractive 4.1%.
The company did cut its dividend back in 2010 before raising it 7% in 2011:
Shares of HME are trading at 14.6x free cash flow, a slight discount to the industry average of 15.3x. The company does trade at a premium on a price to book basis, however, with shares trading at 2.4x book value, compared with the industry average of 1.6x.
Conclusion
The apartment industry is facing some favorable tailwinds over the next several years as homeownership rates will likely continue to decline. With rising estimates, strong growth projections and a 4.1% dividend yield, Home Properties, Inc. looks like a great way to play this trend.
Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.
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