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Can AvalonBay (AVB) Pull Off A Surprise in Q2 Earnings?

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AvalonBay Communities, Inc. (AVB - Free Report) is slated to report second-quarter 2017 results after the market closes on Aug 2.

Last quarter, this Arlington, VA-based, residential real estate investment trust (“REIT”) witnessed a negative surprise of 0.95% in terms of funds from operations (“FFO”) per share. Results reflect growth in net operating income (“NOI”) from existing, acquired and newly developed operating communities. However, the company experienced a rise in interest expense.

Over the trailing four quarters, the company surpassed estimates in one occasion and missed in the other three. This resulted in an average negative surprise of 0.84%. The graph below depicts the surprise history of the company:

Note: The EPS numbers presented in the above chart represent funds from operations (“FFO”) per share.

However, AvalonBay’s shares have climbed 8.6% year to date, against the industry’s gain of 7.0%.



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

Why a Likely Positive Surprise?

Our proven model shows that AvalonBay is likely to beat on estimates because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) to beat estimates, and AvalonBay has the right mix.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 
Zacks ESP: The Earnings ESP, which represents the percentage difference between the Most Accurate estimate of $2.16 and the Zacks Consensus Estimate of $2.14, is +0.94%. This is a meaningful and leading indicator of a likely positive surprise.

Zacks Rank: AvalonBay’s Zacks Rank #3, when combined with a positive ESP, makes us reasonably confident of a positive surprise this season.

What's Driving the Better-than-Expected Earnings?

During the first-quarter 2017 earnings release, AvalonBay announced its FFO per share guidance for second-quarter 2017. AvalonBay estimated FFO per share in the range of $2.18–$2.24 and core FFO per share in the band of $2.07–$2.13. Later, the company noted that it anticipates total rental revenue of established communities for second-quarter 2017 to grow 2.5–2.6% over the prior-year period.

Notably, AvalonBay is well poised to grow on the back of a rising demand from household formation and favorable demographics. Moreover, increasing consumer confidence, on the back of job growth, rising wages, and a healthier balance sheet, promise strong prospects for the company.

Additionally, defying concerns about supply in the market, the residential real estate market is back with a bang, driven by robust demand levels. Per a study by the real estate technology and analytics firm, RealPage, Inc. (RP), the second-quarter demand level of 175,645 apartments across the nation marked one-third increase from the level witnessed a year ago. This helped occupancy to remain high at 95.0% as of mid-year and led to stabilization in the annual pace of rent growth, which came in at 3.6%, close to 3.7% growth experienced in the first quarter. Notably, job formation and checked move-outs for buying homes acted as the catalyst.   

Amid these, AvalonBay is likely to continue experiencing high occupancy. Although pace of rental growth has slowed down from the previous years, it is now likely to achieve stability.

Also, over the past 30 days, the Zacks Consensus Estimate for second-quarter FFO per share inched up 0.5% to 2.14, reflecting analysts’ optimism on the stock.

Stocks That Warrant a Look

Here are a few stocks in the REIT space that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this time around:

CyrusOne Inc. (CONE - Free Report) , likely to release earnings on Aug 2, has an Earnings ESP of +2.70% and a Zacks Rank #2.

Piedmont Office Realty Trust, Inc. (PDM - Free Report) , expected to release earnings on Aug 2, has an Earnings ESP of +2.27% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Boston Properties, Inc. (BXP - Free Report) , likely to release quarterly numbers on Aug 1, has an Earnings ESP of +0.62% and a Zacks Rank #3.

Note:  FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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