U.S. Markets closed

What's in Store for AvalonBay (AVB) This Earnings Season?

Zacks Equity Research
1 / 2

Kennametal (KMT) Tops Q4 Earnings on Solid Sales, Margins

Kennametal's (KMT) fiscal fourth-quarter earnings gain from solid sales, driven by healthy end markets as well as the company's growth, modernization & simplification initiatives. Earnings beat estimates by 6.1%.

AvalonBay Communities, Inc. AVB is slated to report second-quarter 2018 results on Jul 30, after the market closes. The company’s performance is likely to reflect growth in revenues as well as funds from operations (FFO) per share in the quarter.

In the last reported quarter, this residential REIT delivered an in-line performance with respect to FFO per share. Results highlighted growth in average rental rates. However, occupancy level declined marginally, while operating expense flared up due to property taxes, payroll and insurance costs.

Over the trailing four quarters, the company surpassed estimates in one occasion, met in another and missed in the other two. This resulted in an average negative surprise of 1.25%. The graph below depicts the surprise history of the company:

AvalonBay Communities, Inc. Price and EPS Surprise
 

AvalonBay Communities, Inc. Price and EPS Surprise | AvalonBay Communities, Inc. Quote

Let’s see how things are shaping up for this announcement.

Factors to Consider

AvalonBay is well poised to grow on the back of rising demand from household formation and favorable demographics. Also, increasing consumer confidence, driven by job growth, higher wages and a healthier balance sheet, promises bright prospects for this Arlington, VA-based REIT.

The company’s to-be-reported quarter performance is likely to display continued high occupancy. Moreover, in a quarterly update announced in June, the company noted that it expects total rental revenues for established communities in Q2 to climb 2.4-2.5% from the prior-year period. The mid-point of the latest outlook denotes a 15-basis-point expansion from the company’s previous projection.

The Zacks Consensus Estimate for Q2 revenues is $565.4 million, denoting an expected increase of 6.6% year over year. Moreover, the Zacks Consensus Estimate for FFO per share is currently pegged at $2.19, indicating 4.8% growth from the prior-year period.

However, the latest report from the real estate technology and analytics firm, RealPage, Inc. RP, suggests that rent growth in the U.S. apartment market is slowing down. In fact, with several markets witnessing flat rents, U.S. apartment rents increased at an annual pace of just 2.3%, as of mid-2018 — denoting the slowest pace in eight years. While a mid-2018 occupancy level of 95.0% is still healthy, the deceleration in rent growth suggests that a competitive leasing environment is fast building up amid elevated supply, and curbing landlords’ pricing power.

For AvalonBay too, new apartment deliveries are anticipated to have remained elevated in the company’s markets in the April-June quarter. Moreover, supply continues to be most noticeable in the urban submarkets. This high supply is likely to put pressure on rental rates, going forward. Hence, growth in the company’s stabilized portfolio is likely to remain modest in the upcoming period. Furthermore, there is high concession activity amid higher supply, which remains a concern. Also, the Zacks Consensus Estimate of average rental rates at established communities is pegged at $2,586, indicating only a 0.6% sequential rise.

Additionally, the company’s activities during the quarter were inadequate to gain analysts’ confidence. Consequently, the Zacks Consensus Estimate remained unchanged at $2.19 over the last 30 days.

Earnings Whispers

Our proven model does not conclusively show that AvalonBay is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a bullish Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here, as you will see below.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: AvalonBay has an Earnings ESP of -0.75%.

Zacks Rank: AvalonBay’s Zacks Rank of 3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident about a positive surprise.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Ventas Inc. VTR, slated to release second-quarter results on Jul 27, has an Earnings ESP of +0.82% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Vornado Realty Trust VNO, scheduled to release quarterly figures on Jul 30, has an Earnings ESP of +3.30% and a Zacks Rank #3.

HCP, Inc. HCP, set to report Q2 numbers on Aug 2, has an Earnings ESP of +0.66% and carries a Zacks Rank of 3.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>