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What to Expect from AvalonBay (AVB) This Earnings Season?

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AvalonBay Communities, Inc. (AVB - Free Report) is slated to report first-quarter 2021 earnings on Apr 28, after the market closes. The company’s results will likely reflect year-over-year declines in revenues and funds from operations (FFO) per share.

In the last reported quarter, this residential real estate investment trust (REIT) reported a negative surprise of 3.35% in terms of FFO per share. Results reflected decline in residential rental revenues on lease rates, concessions and uncollectible lease revenues.

Over the last four quarters, the company missed estimates on each occasion, the average negative surprise being 2.32%. The graph below depicts the surprise history of the company:

Let’s see how things have shaped up prior to this announcement.

Factors to Consider

For the U.S. apartment market, the first quarter, which typically remains a slow leasing period in other years, appeared to be solid one this year, with impressive demand for rental units. Thanks to employment growth that spurs household formation and housing absorption, demand for 52,661 apartments were registered across the country’s 150 largest metros during the quarter, per a report from the real estate technology and analytics firm RealPage .

This tally is well ahead of the year-ago volume of 29,657 units. Moreover, this year’s first-quarter demand is more than double the average first-quarter demand of about 25,200 units witnessed in the past 10 years. Considering that the first quarter comprises the cold weather months that affect leasing activity, this year’s performance is definitely a notable one.

However, this healthy demand has been the most noticeable in the Sun Belt metros. Demand was also impressive in the sub-urban ones though situations still remain turbulent in some of the gateway markets.

The occupancy level was encouraging in March, though the rent results have been mixed. Particularly, March occupancy came in at 95.5% in the United States’ 150 largest metros. This suggests stability and the occupancy level has been somewhere between 95.2% and 95.8% since late 2019. Considering that the world has been battling a pandemic in the meantime, this stability is particularly encouraging.

Nonetheless, considering the annual rent change, it is important to note that with some of the largest markets having suffered significant declines, the national shift in effective asking rents is still a tad negative at -0.7%. Specifically, San Francisco, San Jose and New York saw significant annual declines in effective asking rents. Nevertheless, the U.S. apartment rents moved up in the first three months of 2021, with a 0.2% increase in January and 0.6% in February, prior to the 0.7% rise in March.

Also, the struggle to lure renters is likely to have continued in the first quarter as well, as supply volumes remained elevated. In the March-end quarter, though demand was solid, apartment absorption still lagged the property completion tally, with new supply aggregating 84,794 units.

Considering AvalonBay, we note that this residential REIT has high-quality assets located in some of the premium markets of the country, and is banking on technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio. The company is also likely to retain its balance-sheet strength.

However, the company has significant exposure to urban residential assets and this portfolio has been feeling the brunt. A number of factors are affecting rental demand, including health concerns of living in dense environments and work-from-home flexibility, that is resulting in a shift of renter demand away from higher cost and urban/infill markets. Furthermore, use of concessions has been rampant in urban portfolios, which is likely to have dented the company’s performance during the quarter under review.

Nevertheless, the company’s portfolio is well diversified and this has been the saving grace during the pandemic as though its urban portfolio is feeling the brunt, the sub-urban portfolio is performing better.

In the earlier-released first-quarter operating update, AvalonBay announced that its total residential rental revenues for established communities for the two-month period ended Feb 28, declined 9.1%, year on year. Management, however, noted that this is in line with the company’s expectation for the first quarter which was issued in early February.

Per the operating update, like-term effective rent change for established communities was a negative 7.9% in February compared with a negative 9.9% in January and negative 10.8% in December. Northern California and Pacific Northwest recorded the sharpest February rent slump, marking a 15.1% and 12.7% decline, respectively, in the month.

AvalonBay’s urban communities too have been affected, though there seems to be some recovery in February. Particularly, rents in established communities in urban region fell 16.6% in February compared with 19.5% in January and 20.5% in December. Rents in established communities in suburban region fell 4.3% in February compared with 5% in January and 5.9% in December.

Encouragingly, AvalonBay witnessed an improvement in average physical occupancy for established communities, which improved to 95% in February, from 94.7% in January and 94.3% in December. As anticipated, suburban communities are enjoying better occupancy compared to urban communities.

Average physical occupancy for suburban communities improved to 95.5% in February, from 95.2% in January and 95% in December. In case of urban communities, average physical occupancy improved to 93.7% in February from 93.3% in January and 92.3% in December.

Region wise, in February, Southern California and Metro New York/New Jersey witnessed highest occupancy, with average physical occupancy of 95.9% and 95.2%, respectively. Yet, Pacific Northwest and Mid-Atlantic had the lowest occupancy, with average physical occupancy of 94.1% and 94.4% level, respectively.

Amid these, the Zacks Consensus Estimate of $549.65 million for first-quarter revenues suggests an 8.6% year-over-year decrease. Established community-economic occupancy is projected at 95% for the quarter, while average rental rates are estimated to be $2,522.

Prior to the quarterly earnings release, analysts seem to have become slightly pessimistic about the company’s prospects as the Zacks Consensus Estimate for the January-March quarter FFO per share moved 2 cents south to $1.94 over the past month. It also suggests a year-over year decline of 18.8%.

Notably, during the fourth-quarter earnings announcement, the company projected core FFO per share in the range of $1.85 and $1.95 for first-quarter 2021. Moreover, the company expects established communities residential revenues to be down 8.5-10%, operating expense to flare up 2.8-5.8% and NOI to slip 13.2-16.2%.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a positive surprise in terms of FFO per share for AvalonBay this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a FFO beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

AvalonBay currently carries a Zacks Rank #4 (Sell) and has an Earnings ESP of -0.75%.

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:

Digital Realty Trust, Inc. (DLR - Free Report) , scheduled to report quarterly numbers on Apr 29, currently has an Earnings ESP of +1.06% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CubeSmart (CUBE - Free Report) , slated to release quarterly numbers on Apr 29, has an Earnings ESP of +3.14% and carries a Zacks Rank of 3 at present.

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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