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What's in Store for AvalonBay (AVB) This Earnings Season?

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AvalonBay Communities, Inc. (AVB - Free Report) is slated to report second-quarter 2021 earnings on Jul 28, after the market closes.The company’s results might display 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 surprise of 0.52% in terms of FFO per share. Results were backed by better-than-anticipated top line figure. The company also witnessed sequential improvement in economic occupancy.

Over the last four quarters, the company surpassed estimate on one occasion and missed in the other three, the average negative surprise being 2.09%. 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 second quarter appeared to be robust this year, with renter demand soaring significantly. The number of occupied apartments in the nation’s 150 largest metros climbed 219,909 units, per a report from the real estate technology and analytics firm RealPage, aided by acceleration in employment growth that drives household formation and housing absorption. This not only marked a significant increase from second-quarter 2020 when demand for apartments was limited to around 33,000 units, given the nationwide lockdown, but also the biggest quarterly upsurge observed in the RealPage, Inc. database.

The Sun Belt metros continue to see healthy demand that have already proved their resilience amid the pandemic. However, the gateway markets too registered solid demand with considerable absorption, after witnessing a tepid environment last year that hurt fundamentals, with job losses and population declines, and a flexible working environment.

The current favorable environment is boosting occupancy levels and in turn, pushing up rents. Per a report from RealPage, occupancy is in line with the early 2000s all-time highs, with effective asking rents rising 2% in June, pushing prices up by 6.3% year over year. This annual rent growth marks the biggest 12-month increase recorded since early 2001. Also, average monthly rent surpassed the $1,500 mark for the first time ever and reached $1,513. Rent growth has also been widespread.

AvalonBay too, with its high-quality assets located in some of the premium markets of the country, is likely to have benefited from the favorable environment. In the second-quarter operating update, AvalonBay reaffirmed its second-quarter outlook for established communities total residential rental revenue change, which is expected to decrease 5.5%, year on year, leading to a 0.0% change in established communities total residential rental revenues compared to first-quarter 2021.

Management noted that the average physical occupancy for its established communities improved to 96% in May from 95.7% in April. This also marked an increase from 95% in first-quarter 2021 as well as 93.9% in fourth-quarter 2020. Like-term effective rent change for established communities was a negative 1.9% in May. This marks an improvement from a negative 5.1% in April, a negative 8.3% in the first quarter, and 11% in fourth-quarter 2020.

Per the operating update, sub-urban communities are enjoying better occupancy compared with urban communities. The average physical occupancy for suburban communities improved to 96.3% in May, from 96.1% in April and 95.5% in first-quarter 2021 and 94.9% in fourth-quarter 2020. In case of urban communities, average physical occupancy improved 95.1% in May, from 94.5% in April and 93.6% in first-quarter 2021 and 91.4% in fourth-quarter 2020.

The Zacks Consensus Estimate of $551.8 million for second-quarter revenues suggests a 4.3% year-over-year decrease. Established community-economic occupancy is projected at 96% for the quarter, while average rental rates are estimated to be $2,443.

Moreover, the company is banking on technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio. It is also likely to retain its balance-sheet strength.

Prior to the quarterly earnings release, analysts seem to be optimistic about the company’s prospects as the Zacks Consensus Estimate for the April-June quarter FFO per share moved a cent north to $1.93 over the past month. However, it suggests a year-over year decline of 13.4%.

Here is what our quantitative model predicts:

Our proven model predicts 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 chances of a FFO beat. 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 of 3 and has an Earnings ESP of +0.19%.

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 too have the right combination of elements to report a positive surprise this quarter:

Mid-America Apartment Communities (MAA - Free Report) , scheduled to report second-quarter earnings on Jul 28, currently has an Earnings ESP of +2.65% and carries a Zacks Rank of 3.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Equity Residential (EQR - Free Report) , slated to report quarterly numbers on Jul 27, currently has an Earnings ESP of +1.43% and carries a Zacks Rank of 3.

UDR Inc. (UDR - Free Report) , slated to release quarterly numbers on Jul 28, has an Earnings ESP of +0.91% and has 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.