U.S. Markets closed

REITs to Watch for Q4 Earnings on Feb 4: AVB, ARE, AIV & KRC

Zacks Equity Research

A number of Q4 earnings releases are queued for the next week, of which office REITs Kilroy Realty Corporation KRC and Alexandria Real Estate Equities ARE, along with residential REITs AvalonBay Communities, Inc. AVB and Apartment Investment & Management Co. AIV, are slated to report their quarterly numbers on Feb 4.  

Economic improvement and recovery in the job market have spurred demand for various real estate categories. The U.S. office real estate market has been gathering steam on the back of a healthy economy and has witnessed growth in demand for office spaces. This has enabled office landlords to enjoy higher capability to raise rents for properties.

Per a study by the commercial real estate services firm — CBRE Group CBRE — the fourth-quarter office vacancy rate declined to its lowest level in 11 years, by 10 basis points (bps) to 12.6%. Furthermore, job growth boosted annual net absorption to 58.3 million square feet of space — the highest since 2015.

Also, 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 picked up and reached 3.3% in the quarter, ahead of the 2.5% recorded in 2017. In addition, occupancy came in at 95.4%, up from the 95% reported at year-end 2017.

Per the quantitative Zacks model, stocks with the perfect combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), and a positive Earnings ESP have substantially higher chances of beating estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s delve deeper into what can be expected from the above-mentioned REITs’ fourth-quarter and 2018 earnings performance.

AvalonBay Communities is expected to benefit from high-quality assets in premium locations, favorable demographics and household formation trends in fourth-quarter 2018. Notably, per a quarterly update, the company expects rental revenues for established communities in the quarter to be up 2.5-2.6% from the prior-year quarter.

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 rise.

Moreover, the Zacks Consensus Estimate for fourth-quarter revenues is $575.1 million, denoting an expected 3.6% year-over-year increase. Further, the Zacks Consensus Estimate for funds from operation (FFO) per share is currently pinned at $2.32, indicating 3.1% growth from the prior-year period. (Read more: Key Factors to Impact AvalonBay This Earnings Season)

AvalonBay Communities’ Earnings ESP is +0.22% and currently carries a Zacks Rank of 3, making us reasonably confident of a positive surprise.

The company’s surprise history is depicted in the chart below:

AvalonBay Communities, Inc. Price and EPS Surprise

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

Apartment Investment & Management Co., commonly known as Aimco, has made immense efforts to enhance its portfolio and generate higher revenues. In line with this, the company has been selling low-return properties and investing these proceeds in strategic apartment communities that offer high projected free cash flow internal rates of return. We expect the company to reap benefits of these efforts in the fourth quarter as well.

In fact, the Zacks Consensus Estimate for fourth-quarter rental and other property revenues attributable to real estate is pegged at $235 million, indicating a marginal increase sequentially.

However, apartment deliveries are expected to have remained elevated in a number of Aimco’s markets in the quarter. This high supply is a concern because it curtails landlords’ ability to command more rent and result in lesser absorption. Such an environment is predicted to have resulted in aggressive rental concessions and moderate pricing power of landlords, thereby impacting its top-line growth.

The Zacks Consensus Estimate for fourth-quarter total revenues is pinned at $237.2 million, indicating a year-over-year decline of 7%.

Further, we anticipate its results to bear the brunt of earnings dilution on account of asset dispositions. (Read more: What's in Store for Aimco's Earnings This Season?)

Currently, Aimco has an Earnings ESP of -1.58% and a Zacks Rank of 2. So, we can’t conclusively predict an earnings beat.

The company’s surprise history is depicted in the chart below:

Apartment Investment and Management Company Price and EPS Surprise

Apartment Investment and Management Company Price and EPS Surprise | Apartment Investment and Management Company Quote

Alexandria’s fourth-quarter results will likely reflect year-over-year growth in its FFO per share and revenues.In the Oct-Dec quarter, the company made strategic efforts to enhance its life-science and technology campus portfolio in a bid to gain from the strengthening industry fundamentals.

Hence, we anticipate the company to have witnessed solid demand from life-science and tech tenants during the fourth quarter, on the back of these efforts. Moreover, we expect the company to have witnessed healthy rent escalations and leasing activity at positive rent spreads, given the strategic location of its clusters. This will likely have boosted Alexandria’s fourth-quarter revenues. In fact, the Zacks Consensus Estimate for the same is pegged at $344.5 million and reflects a year-over-year jump of 15.3%.

The company has initiated a number of development projects in a bid to strengthen its life-science portfolio. However, amid rising construction-cost scenario, we anticipate Alexandria to have witnessed cost overruns. This will likely decrease development returns for the company’s development projects and in turn, adversely impact its fourth-quarter bottom-line performance.

Further, the rising interest rate scenario is expected to have escalated cost of financing the company’s development pipeline. (Read more: Alexandria to Post Q4 Earnings: What's in the Cards?)

Currently, Alexandria has an Earnings ESP of 0.00% and a Zacks Rank of 2. So, we can’t conclusively predict an earnings beat.

The company’s surprise history is depicted in the chart below:

Alexandria Real Estate Equities, Inc. Price and EPS Surprise

Alexandria Real Estate Equities, Inc. Price and EPS Surprise | Alexandria Real Estate Equities, Inc. Quote

Kilroy Realty’s fourth-quarter results will likely reflect year-over-year growth in its FFO per share and revenues.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate in two occasions, missed in another and met in the other. It delivered average positive surprise of 0.57% during this period.

The graph below depicts this surprise history:

Kilroy Realty Corporation Price and EPS Surprise

Kilroy Realty Corporation Price and EPS Surprise | Kilroy Realty Corporation Quote

With more than 70 years of experience in developing, acquiring and managing office and mixed-use real estate assets, Kilroy Realty particularly focuses on offering physical work environments that suit the need of tenants from the technology, entertainment, digital media and health care sectors.

Improvements in macroeconomic environment and the strengthening job market have likely driven demand for the company’s office space. However, increasing supply of office space may have curtailed the company’s ability to raise rents. In fact, the Zacks Consensus Estimate for fourth-quarter rental revenues is pegged at $162 million, unchanged sequentially.

Further, the Zacks Consensus Estimate for revenues from tenant reimbursements is pegged at $22.26, increasing 2.3% sequentially.

However, there is lack of any solid catalyst prior to the fourth-quarter earnings release. As such, the Zacks Consensus Estimate for FFO per share for the to-be-reported quarter remained unchanged at 89 cents over the past month. Nonetheless, it represents year-over-year growth of 4.7%.

With an Earnings ESP of 0.00% and a Zacks Rank of 4 (Sell), we can’t conclusively predict an earnings beat for the company.

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.

More Stock News: This Is Bigger than the iPhone!

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.

Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.

Click here for the 6 trades >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Kilroy Realty Corporation (KRC) : Free Stock Analysis Report
 
Alexandria Real Estate Equities, Inc. (ARE) : Free Stock Analysis Report
 
CBRE Group, Inc. (CBRE) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research