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We are in the heart of the Q1 reporting cycle and the real estate investment trust (REIT) space is buzzing with activity. In fact, there is a deluge of Q1 earnings releases lined up for this week, of which AvalonBay Communities, Inc. AVB, Duke Realty Corporation DRE, Public Storage PSA and UDR Inc. UDR will release quarterly numbers on Apr 25.
Rate hike and cautious approach of investors have affected returns from this industry, so far, this year. However, with underlying asset categories and the location of properties playing a crucial role in determining REITs’ performance, not all players in the space are equally poised to excel or fall behind this season.
Per a study by the commercial real estate services firm — CBRE Group Inc. CBRE — availability fell for 31 straight quarters to 7.3% for the U.S. industrial market in first-quarter 2018. The figure not only marked a contraction of 6 basis points (bps) sequentially, but also shrunk 20 bps, year over year, on average, across 50 markets that are followed by CBRE. Moreover, net asking rents inched up 1.9% in Q1 to $7.01 per square foot, denoting the highest mark since CBRE started following the metric in 1989. High consumption levels, strengthening e-commerce market, and a healthy manufacturing environment amid recovering economy and job market are fueling demand.
However, the latest report from the real estate technology and analytics firm — RealPage, Inc. RP — states that the national apartment market moderated in the Jan-Mar quarter. Nevertheless, the first quarter marks a slow leasing period, thanks to the cold weather that inhibits shift of households and limits growth in demand.
Going by statistics, annual rent growth shrunk to 2.3% in Q1. This marked moderation from the 2.6-2.9% growth rate experienced throughout 2017. Occupancy level of 94.5% this March edged down from the prior-year tally of 95%, with metros having subdued construction activity faring well and recording the strongest occupancy. Nevertheless, the overall occupancy level is still healthy.
Furthermore, the self-storage industry is anticipated to experience solid demand backed by favorable demographic changes, improving job market and rising incomes, as well as events like marriages, shifting, death, and even divorce. Also, due to shorter leasing periods, this REIT has the power to adjust its rents quickly to any rate hike.
Therefore, let’s have a close look at the factors that will impact the above-mentioned REITs’ first-quarter results.
AvalonBay Communities Inc.
Residential REIT AvalonBay is well poised to grow on the back of rising demand from household formation and favorable demographics. Additionally, increasing consumer confidence driven by job growth, higher wages and a healthier balance sheet promises brighter prospects for this Arlington, VA-based REIT. Amid these, the company is likely to continue experiencing high occupancy.
However, there is an increasing apartment supply in a number of markets of the company. This high supply is expected to have put pressure on rental rates in the to-be-reported quarter. In addition, there is high-concession activity amid elevated supply, which remains a concern. (Read more: AvalonBay to Post Q1 Earnings: What's in the Cards?)
In a March-issued operating update for the first quarter, AvalonBay stated that it expects total rental revenues for established communities to be up 2.3-2.4% year over year. The Zacks Consensus Estimate for first-quarter revenues is $558.5 million, denoting an expected increase of 6.9% year over year. Further, the Zacks Consensus Estimate for funds from operations (FFO) per share is pegged at $2.18, indicating projected increase of 4.3% year over year.
Moreover, 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 at least 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.
In fact, though AvalonBay has a favorable Zacks Rank of 3, its Earnings ESP of -0.28% makes surprise prediction difficult.
Moreover, AvalonBay has a mixed surprise history, as evident from the chart below:
AvalonBay Communities, Inc. Price and EPS Surprise
AvalonBay Communities, Inc. Price and EPS Surprise | AvalonBay Communities, Inc. Quote
Duke Realty Corporation
In recent years, Duke Realty has made concerted efforts to enhance its industrial portfolio. Admittedly, this asset class has been witnessing improving fundamentals amid economic recovery and growth of e-commerce business. This is spurring demand for warehouse space as companies are compelled to enhance and renovate their distribution and production platforms, helping the industrial real estate market to record growth.
Nonetheless, Duke Realty is enhancing its portfolio mix through continued divestitures, which includes the significant disposition of sub-urban office assets and medical office buildings. While such efforts are a strategic fit for the long term, the near-term dilutive effect on earnings cannot be bypassed. Furthermore, the company faces significant competition from developers, owners and operators of the commercial real estate. This influences its ability to attract and retain tenants at relatively higher rents than its competitors. (Read more: Duke Realty to Post Q1 Earnings: What's in the Offing?)
The Zacks Consensus Estimate for first-quarter revenues is currently pegged at $183.8 million, indicating a decline of 15.7% year over year. Also, the Zacks Consensus Estimate for FFO per share is 30 cents, pointing to an estimated year-over-year decline of 6.3%.
Although Duke Realty has a favorable Zacks Rank of 3, its Earnings ESP of -1.70% lowers chances of any positive surprise this season.
The story about Duke Realty’s decent surprise history is better told by the chart below:
Duke Realty Corporation Price and EPS Surprise
Duke Realty Corporation Price and EPS Surprise | Duke Realty Corporation Quote
Public Storage is one of the largest owners and operators of storage facilities in the United States. High brand value, strategic acquisitions, robust presence in key cities and healthy balance sheet serve as major growth drivers for the company. The company is likely to be able to achieve reasonable rate hike for its existing customers. In addition, acquisition and expansion initiatives are anticipated to stoke growth.
Amid these, the company remains well poised to record growth in revenues. The Zacks Consensus Estimate for revenues is pegged at $668.9 million, depicting projected rise of 3.6%. Further, the Zacks Consensus Estimate for FFO per share is currently pegged at $2.46, indicating an expected rise of 5.1% year over year.
Nevertheless, supply has been rising in a number of markets and this adversely affects the company’s pricing power. In fact, it operates in a highly fragmented market in the nation, with intense competition from numerous private, regional and local operators. This, in turn, limits the company’s power to raise rents and turn on more discounting. (Read more: Public Storage to Post Q1 Earnings: What's in Store?)
Moreover, with an Earnings ESP of 0.00% and a Zacks Rank of 3, our proven model does not conclusively show that Public Storage will likely beat estimates this season. You can see the complete list of today’s Zacks #1 Rank stocks here.
The company has a mixed surprise history that is depicted by the graph below:
Public Storage Price and EPS Surprise
Public Storage Price and EPS Surprise | Public Storage Quote
UDR boasts a vast experience in the residential real estate market. Additionally, it has a superior portfolio in targeted U.S. markets and adheres to disciplined capital allocation. These are likely to drive results in the to-be-reported quarter. Specifically, the company is predicted to benefit from favorable demographic trends. There is a steady demand for rental apartments from both new millennial households and empty nesters. Along with this, the healthy job market is estimated to drive demand for apartments.
However, the company has been dealing with escalating deliveries in a number of its markets. This remains a concern as elevated levels of supply curtail landlords’ ability to demand higher rents and result in lesser absorption. Consequently, concession levels are estimated to have remained at the higher end, while UDR’s pricing power might have been limited in the quarter. (Read more: UDR to Post Q1 Earnings: What's in Store for the Stock?)
The Zacks Consensus Estimate for FFO per share for the soon-to-be-reported quarter is pegged at 47 cents. This indicates a 4.4% increase year over year. For the first quarter, management projects FFO per share of 46-48 cents. Moreover, the Zacks Consensus Estimate for first-quarter revenues is pegged at $253 million, indicating year-over-year improvement of 3.8%.
Although UDR has a favorable Zacks Rank of 3, its Earnings ESP of -0.30% lowers chances of any positive surprise this season.
The story about UDR’s surprise history is better told by the chart below:
United Dominion Realty Trust, Inc. Price and EPS Surprise
United Dominion Realty Trust, Inc. Price and EPS Surprise | United Dominion Realty Trust, Inc. Quote
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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RealPage, Inc. (RP) : Free Stock Analysis Report
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United Dominion Realty Trust, Inc. (UDR) : Free Stock Analysis Report
Public Storage (PSA) : Free Stock Analysis Report
Duke Realty Corporation (DRE) : Free Stock Analysis Report
CBRE Group, Inc. (CBRE) : Free Stock Analysis Report
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