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Key Factors to Impact AvalonBay (AVB) This Earnings Season

Zacks Equity Research

AvalonBay Communities, Inc. AVB is slated to report fourth-quarter and full-year 2018 results on Feb 4, after the market closes. The company’s quarterly performance is likely to reflect growth in revenues as well as funds from operations (FFO) per share.

In the last reported quarter, this residential REIT delivered a better-than-expected performance with respect to FFO per share. The company’s results highlighted growth in average rental rates.

Over the trailing four quarters, the company surpassed estimates in three occasions and met in another. This resulted in average positive surprise of 0.56%. 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

The U.S. apartment market witnessed an encouraging fourth quarter in 2018, with accelerated rent growth and elevated occupancy level amid robust demand for rental units. Per a study by the real estate technology and analytics firm — RealPage, Inc. — the annual pace of apartment rent growth in the United States accelerated and reached 3.3% in the quarter, ahead of the 2.5% recorded in 2017.

Also, occupancy came in at 95.4%, up from 95% reported at year-end 2017. Reflecting the strongest demand realized since 2010, occupied apartment tally moved up by 323,290 units in 2018, and demand surpassed annual completions that aggregated 287,007 units.

Amid these, AvalonBay is expected to benefit from high-quality assets in premium locations, favorable demographics, household formation, recovering economy and job-market growth. The company is also expected to have maintained its balance-sheet strength.

Notably, per a quarterly update, residential REIT AvalonBay expects rental revenues for established communities in Q4 to climb 2.5-2.6% from the prior-year quarter. The mid-point of the fourth-quarter outlook denotes a 15-basis-point expansion from what was expected for the quarter when it provided the 2018 established communities rental revenue growth outlook in October.

This apart, the company provided established communities’ like-term effective rent change for October and November (includes data through Nov 27, 2018). Specifically, like-term effective rent change for both months was 3% in Northern California and 2.4% in the Mid-Atlantic. For Metro NY/NJ, like-term effective rent change was 2.9% for November and 2.7% for October. For the company’s overall established communities, like-term effective rent change was 2.3% for November and 2.7% for October.

The company’s performance in the to-be-reported quarter is likely to display continued high occupancy. Also, the Zacks Consensus Estimate for average rental rates at established communities is pegged at $2,642, indicating a 0.3% sequential increase.

Moreover, the Zacks Consensus Estimate for fourth-quarter revenues is $575.1 million, denoting an expected 3.6% year-over-year increase. Also, the Zacks Consensus Estimate for FFO per share is currently pegged at $2.32, indicating 3.1% growth from the prior-year period.

In addition, during the fourth quarter, AvalonBay completed the sale of 80% interest in five Manhattan apartment communities. The move came as part of the company’s effort to monetize a considerable portion of investments in these properties. In fact, the transaction, which was based on a total asset valuation of around $760 million, helped AvalonBay improve financial flexibility. The company reaped net proceeds of around $470 million from the move.

Additionally, the company’s activities during the quarter gained analysts’ confidence to some extent. Consequently, the Zacks Consensus Estimate moved up a cent to $2.32 over the past 90 days.

However, new apartment deliveries are anticipated to have remained elevated in the company’s markets in the Oct-Dec quarter. Furthermore, high concession activity amid elevated supply remains a concern.

Here is what our quantitative model predicts:

AvalonBay has the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP: The Earnings ESP for AvalonBay is +0.22%.

Zacks Rank: AvalonBay carries a Zacks Rank #3, currently.

A positive Earnings ESP is a meaningful and leading indicator of a likely beat in terms of FFO per share. This, when combined with a favorable Zacks rank, makes us reasonably confident of a positive surprise.

Other Stocks That Warrant a Look

Here are a few other 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:

Simon Property Group SPG, slated to report fourth-quarter results on Feb 1, has an Earnings ESP of +0.07% and holds a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American Tower Corporation AMT, set to release earnings on Feb 27, has an Earnings ESP of +0.29% and carries a Zacks Rank of 3.

Omega Healthcare Investors, Inc. OHI, scheduled to report quarterly numbers on Feb 11, has an Earnings ESP of +0.26% and holds a Zacks Rank of 2.

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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