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Investment Ideas

As the meteoric rise in home prices has spiraled into a spectacular crash, more and more individuals are opting to rent rather than buy.

People have understandably become hesitant to plunk down thousands of dollars into a highly leveraged, highly illiquid asset that might actually go down in price in the near-term. And individuals who actually do want to buy are finding that obtaining a mortgage is harder than it was just a few years ago.

Homeownership Rates Falling

These factors have led to a decline in homeownership rates over the last few years.

Homeownership rates have been steadily declining since 2007 but are still above their 30-year average of 65.9% (the average from 1980 through 1999 is 64.7%). And with more than 25% of homes underwater and prices expected to decline even further in 2011, don't expect this trend to reverse anytime soon.

Throw in the swarms of people whose credit has been shattered by foreclosures and short sales, and you have a lot of people looking for places to rent.

Rental Vacancy Rates Falling

As a result, rental vacancy rates have fallen sharply since late 2009.

This increase in demand is leading to an increase in rental prices too. Many experts are forecasting vacancy rates to further decline as supply is unable to keep up with demand. This will lead to a significant rise in rents over the next several years.

Apartment REITs

One way to play this trend is to invest in apartment real estate investment trusts (REITs). One of the great benefits of REITs is that they typically pay a fat dividend. This is because REITs pay no federal income tax as long as they pass on at least 90% of their net income to shareholders through dividends.

Here is a list of Apartment REITs benefiting from the housing crash:

Associated Estates Realty Corp (AEC - Snapshot Report) owns and manages apartment communities in the Midwest, Mid-Atlantic and Southeast regions of the U.S. Its portfolio consists of 52 properties containing 13,662 units in 8 states.

AEC has been diversifying away from the Midwest (where homeownership rates are higher and rents are lower) to higher growth, higher rent markets. The move is paying off. Physical occupancy was 94.7% at the end of 2010, up from 93.9% at the end of 2009. Furthermore, average net rent collected rose 2.1% to $866 per month.

Shares trade at just 14.6x forward earnings, which is in-line with the industry average. AEC also pays a dividend that yields 4.4%.

It is a Zacks #1 Rank (Strong Buy) stock.

Post Properties, Inc. (PPS - Snapshot Report) develops and operates upscale apartment communities in the Southeastern and Southwestern U.S.

Post delivered its sixth consecutive positive earnings surprise in February. Funds from Operations (FFO) rose 26% in the fourth quarter of 2010 as occupancy rates increased from 94.4% to 95.2%.

Analysts expect FFO of $1.61 per share in 2011, a 33% increase over 2010. Post also pays a dividend that yields 2.2%.

It is a Zacks #1 Rank (Strong Buy) stock.

AvalonBay Communities, Inc. (AVB - Analyst Report) develops and manages apartment communities in high barrier to entry markets throughout the U.S.

Within its established communities, average rental rates rose 2.9% in the fourth quarter of 2010. Management expects this trend to continue in 2011. It gave FFO guidance of $4.50 to $4.75 per share. The Zacks Consensus Estimate is within this range at $4.63, representing 16% growth over 2010.

AvalonBay pays a dividend that yields an attractive 3.0%. It is a Zacks #2 Rank (Buy) stock.

UDR, Inc. (UDR - Analyst Report) owns and manages middle-market apartment communities. As of December 31, 2010, it owned or had an ownership position in 59,614 apartment homes.

Physical occupancy in the fourth quarter of 2010 was an impressive 95.6%, up 20 basis points from the same quarter in 2009. Management expects revenue to increase 3.5% to 4.5% in 2011 and a 95% occupancy rate. FFO per share is expected to be between $1.20 and $1.25. The Zacks Consensus Estimate is within guidance at $1.24. This equates to 13% growth over 2010 FFO per share.

UDR yields 3.2%. It is a Zacks #3 Rank (Hold) stock.

MAA (MAA - Snapshot Report) owns and operates apartment communities in the Sunbelt regions of the U.S.

Physical occupancy was 95.8% in the fourth quarter of 2010, up 0.6% from the same quarter in 2009. Effective rent per unit was up 0.3% to $723.40.

MAA has a history of steadily raising its dividend. It currently yields an attractive 4.0%.

Shares trade at 15.4x forward earnings. It is a Zacks #3 Rank (Hold) stock.

Conclusion

The apartment REIT industry should experience a nice tailwind over the next several years as homeownership rates fall and apartment occupancy rates rise. These five stocks are a great way to ride this trend while enjoying solid dividend income along the way.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

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