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Markets

Home Properties: Apartment Hunter

A REIT that specializes in upgrading apartments could be upgrading its portfolio.

Home Properties sits in one of the sweetest spots of the real estate market. The Rochester, N.Y., real estate investment trust (symbol HME) has built a portfolio that consists mainly of apartment buildings in places where there's little or no space to build any more of them. Plus, most of Home's properties are in East Coast cities with scarily high housing prices. So the demand from middle-income families for the kind of units that Home specializes in is strong and likely to stay that way for some time.

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News of a potential upgrade in Home's portfolio led to an upgrade of its shares on October 3 by Wachovia Capital Markets. Wachovia, which now rates the stock "outperform," acted after Home announced that it had struck a deal to sell its entire portfolio of 4,567 apartment units in slow-growing upstate New York. The proceeds will likely be used to buy properties in more-attractive markets, including Washington, D.C., Philadelphia and the New York City suburb of Long Island. In a similar vein, Home recently sold Detroit properties and bought some in suburban Boston.

Home's recipe is to buy older apartment buildings, spruce them up, add such amenities as pools, and then increase rents. The formula has helped make the company one of the largest apartment owners in the nation, with nearly 50,000 units.

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Wachovia makes two other bullish arguments on behalf of the stock. It says that declining energy costs should boost Home's profitability. And the sale of the upstate New York properties gives Home more cash to buy back shares. However, the buyback program will probably slow from its recent pace because the spread between the stock's price ($58.82) and the estimated value of its assets after accounting for debt ($62 to $63 per share) has shrunk as the shares have appreciated from $35 a year ago.

Given the run-up and the narrow gap between the stock and underlying value, it's hard to argue that Home's shares are cheap. Wachovia figures that the shares will rise in tandem with earnings gains, which analysts peg at just 5% in 2007, to $3.18 per share. That may not be a huge gain, but add the 4.5% dividend yield, and Home looks like a steady, if unspectacular, investment.

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