Neutral (HME, $63.34)
Formidable yet Fully-priced Mid- Atlantic and Northeast MF REIT. Initiating with A Neutral Rating at a $64 Price Target
August 12, 2014
John R. Benda
Investment Conclusion. We are initiating coverage of Home Properties, Inc. (HME) with a Neutral rating and $64 price target as we believe the shares are fully priced at current levels. Further, given its portfolio size of 41,532 units we feel HME would need a Mid-America Apartment Communities (NYSE: MAA – Neutral) / Colonial Properties Trust or type merger or AvalonBay (NYSE: AVB – NR) / Archstone portfolio type acquisition to deliver additional total return to shareholders. Our price target is derived from a 50/50 blend of our $68.93 Net Asset Value (“NAV”) estimate and $59.18 Price/Funds From Operations (“P/FFO”) model estimate. Our $64 price target implies an annual total return, including the current 4.6% dividend yield, of 5.7% at the current stock price.
Source: Capital IQ, National Securities Corporation Estimates
High Barrier to Entry Land Constrained Market Footprint. At June 30, 2014, HME maintained some 41,950 apartment units in 7 states throughout the Northeast and Mid- Atlantic markets, including Washington, D.C. For those familiar with the real estate market and as all of the publicly traded new homebuilders will attest, the Northeast and Mid-Atlantic markets are amongst the most land constrained markets in the nation, as well as being population dense.. Dense population and land constraints are the two key ingredients to rental and asset price appreciation, a key factor HME has working in its favor.
Portfolio Growth Lags Peers and Needs Large Acquisition to Move the Needle. Using AvalonBay Communities Inc (NYSE: AVB – Not Rated), Camden Property Trust (NYSE: CPT – Not Rated), Essex Property Trust Inc (NYSE: ESS – Not Rated), Mid- America Apartment Communities Inc (NYSE: MAA – Neutral), Post Properties Inc (NYSE: PPS – Neutral) and UDR, Inc. (NYSE: UDR – Not Rated) as its peer group for portfolio growth, HME has posted a 2.8% 3-Year apartment unit CAGR vs. the peer median of 3.2%, 40bps of underperformance. From FYE2010 to 1Q14 HME’s unit count is up just 6.9% net, well below the 9.8% median figures for its peer group. We use median figures because in 2013 the MF REIT sector saw two major consolidation efforts. In November...
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