Is a Beat in Store for AvalonBay (AVB) This Earnings Season?
AvalonBay Communities AVB, a leading real estate investment trust (REIT) specializing in the development, acquisition and management of multifamily properties, is set to announce third-quarter 2023 earnings on Oct 25 after the closing bell.
In the last reported quarter, this residential REIT delivered a surprise of 2.31% in terms of core funds from operations (FFO) per share. The quarterly results reflected a year-over-year increase in same-store residential rental revenues, driven by solid lease rate growth.
Over the last four quarters, AvalonBay’s core FFO per share surpassed the Zacks Consensus Estimate on three occasions and missed it once, the average beat being 0.67%. The graph below depicts the surprise history of the company:
AvalonBay Communities, Inc. Price and EPS Surprise
AvalonBay Communities, Inc. price-eps-surprise | AvalonBay Communities, Inc. Quote
As we approach the release of AvalonBay's third-quarter earnings report, it is important to examine how this residential REIT is likely to have performed amid the current market conditions.
U.S. Apartment Market in Q3
Per a recent RealPage report, apartment demand in the United States during the third quarter continued to show signs of solid rebound even though rent growth was somewhat flat.
The U.S. apartment market absorbed 90,827 units per the RealPage Market Analytics. Although the figure does not compare to the historically robust demand of 2021, it still marks the largest quarterly tally in nearly two years and is in sync with the long-term seasonal norms.
However, the quarter saw the highest levels of apartment completions since the 1980s, with more than 128,000 units coming online nationally, shifting the balance of power in the rental market back to renters.
The effective asking rents fell 0.3% in September. As a result, year-over-year rent growth was just 0.1% during the quarter. This compares with 9% recorded a year ago. The key reason behind this is that apartment operators are prioritizing occupancy rates over rents to safeguard cash flow, leading to more options for renters and putting downward pressure on rent growth.
Speaking of the U.S. apartment occupancy, despite the supply surge, the solid demand helped maintain occupancy levels near the long-term average. After slipping only 10 basis points (bps) in September, occupancy at the end of the third quarter was 94.4%.
AvalonBay's Portfolio and Strategy
AvalonBay has properties in the high-barrier-to-entry regions of the United States, which generally command the highest rents in the markets. These markets include New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California. They are characterized by growing employment in the high-wage sectors of the economy and a diverse and vibrant quality of life, enabling AVB to maintain strong occupancy rates and command premium rents at its top-quality apartment communities.
AvalonBay is banking on technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio. Its emphasis on long-term value creation and risk management has also contributed to its solid financial performance and ability to generate consistent cash flow.
The company is making concerted efforts to expand its portfolio in the growing markets of Raleigh-Durham and Charlotte, NC; Southeast Florida; Dallas and Austin, TX; and Denver, CO, which is likely to pay off well over the long run.
Projections for Q3
For the third quarter of 2023, we expect the company’s same-store net operating income to exhibit year-over-year growth of 1.2%. The same-store average rental rates are projected to increase 5.5% while economic occupancy is estimated at 95.6%.
The Zacks Consensus Estimate for third-quarter 2023 revenues is pegged at $692.06 million, suggesting a year-over-year increase of 4.02%.
The company’s activities during the to-be-reported quarter were adequate to secure analysts’ confidence. The Zacks Consensus Estimate for the quarterly core funds from operations (FFO) per share has been revised a cent north in the past week to $2.64. The figure indicates year-over-year growth of 5.6%.
AvalonBay's Q3 Performance Through August
Per its recent operating update, this residential REIT reported a 5.3% increase in same-store residential rental revenues for the two months ended Aug 31, 2023, from the prior-year period. Compared with the company’s most recent expectation as of Jul 31, 2023, this is roughly 40 bps higher.
Physical occupancy for AVB’s same-store residential communities for August edged up 40 bps from the prior month and 10 bps from the end of the second quarter of 2023 to 95.6%.
However, the like-term effective rent change for the same-store residential communities dipped to 3% in August from 3.9% witnessed in July and 4.9% in the second quarter. For September and October 2023, renewal offers delivered to residents were at an average increase in the mid-5% range over the existing lease.
AvalonBay expected core FFO per share in the range of $2.55-$2.65 for the third quarter of 2023.
What Our Quantitative Model Predicts
Our proven model predicts a surprise in terms of FFO per share for AvalonBay this season. The right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — increases the odds of a beat. That is just the case here.
Earnings ESP: AvalonBay has an Earnings ESP of +0.76%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: AvalonBay currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Conclusion
AvalonBay Communities is well-positioned to capitalize on the rebounding U.S. apartment market in the third quarter of 2023. Investors will closely watch the company's earnings release to evaluate its ability to grow revenues, manage expenses and deliver shareholder value through dividends. A solid performance in the third quarter of 2023 could make AVB an attractive investment opportunity in the multifamily REIT space.
Other Stocks That Warrant a Look
Here are some other stocks that are worth considering from the residential REIT sector, as our model shows that these, too, have the right combination of elements to deliver a surprise this reporting cycle:
United Dominion Realty Trust UDR is slated to report quarterly numbers on Oct 26. UDR has an Earnings ESP of +0.16% and carries a Zacks Rank #3 presently.
Equity Residential EQR is slated to report quarterly numbers on Oct 31. EQR has an Earnings ESP of +0.50% and carries a Zacks Rank of 3 presently.
Spirit Realty Capital SRC is slated to report quarterly numbers on Nov 2. SRC has an Earnings ESP of +1.43% and carries a Zacks Rank #2 presently.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
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.
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AvalonBay Communities, Inc. (AVB) : Free Stock Analysis Report
Equity Residential (EQR) : Free Stock Analysis Report
United Dominion Realty Trust, Inc. (UDR) : Free Stock Analysis Report
Spirit Realty Capital, Inc. (SRC) : Free Stock Analysis Report
