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Why Q2 Earnings Could Be Dampening for Aimco (AIV) Stock

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Apartment Investment & Management Co. (AIV - Free Report) — commonly known as Aimco — is slated to report second-quarter 2018 results on Aug 2, after the market closes. While its funds from operations (FFO) per share are expected to have increased year over year, the top-line results will likely display a decline.

In the last reported quarter, this Denver, CO-based residential real estate investment trust (REIT) met the Zacks Consensus Estimate for FFO per share. Results displayed growth in property net operating income (NOI), supported by same-store properties, and lease-up of redevelopment and acquisition communities. However, these positives were partially offset by lower NOI from apartment sales in 2017 and 2018.

Aimco has a mixed earnings surprise history. Over the trailing four quarters, the company outpaced the Zacks Consensus Estimate in two occasions and reported in-line numbers in the other two. Overall, the stock witnessed an average positive surprise of 0.82%. This is depicted in the chart below:

Factors at Play

Per the latest report from the real estate technology and analytics firm, RealPage, Inc (RP - Free Report) suggests that rent growth in the U.S. apartment market is slowing.  In fact, with several markets experiencing flat rents, U.S. apartment rents increased at an annual pace of just 2.3% as of mid-2018, marking its slowest pace in eight years. While a mid-2018 occupancy level of 95.0% is still healthy, the deceleration in rent growth suggests that a competitive leasing environment is fast building up amid elevated supply, and curbing landlords’ pricing power. This is expected to have impacted Q2 results of residential REITs like AvalonBay Communities, Inc. (AVB - Free Report) and Equity Residential (EQR - Free Report) .

In fact, pricing power gained during the second quarter is of crucial importance for apartment REITs. This is because leasing activity gains momentum in this quarter following a slow-leasing Q1, thanks to the cold weather that inhibits shift of households and limits growth in demand.

Also, Aimco has been making concerted efforts to revamp its portfolio through property sales and by reinvesting the proceeds in select apartment homes with higher rents, superior margins and higher-than-expected growth. Further, on Apr 26, the company announced plans to sell its asset-management portfolio, along with four affordable garden-style communities, for $590 million.

While such streamlining efforts are a strategic fit for the long term, the near-term dilutive effect cannot be bypassed. In fact, such short-term impact is likely to drag the company’s quarterly results.

Further, the recent rate hikes are expected to escalate the company’s interest expenses in Q2. Moreover, amid rising rates, not only the financing costs will increase, but the common stock buyers will also demand a higher dividend yield and this may unfavorably impact the market price of the common stock.

Prior to the second-quarter earnings release, there is a lack of any solid catalyst for raising optimism about the company’s business activities and prospects. Over the past month, the Zacks Consensus Estimate for FFO per share for the soon-to-be-reported quarter remained unchanged at 62 cents. This indicates a 1.6% year-over-year increase. For the June-end quarter, management projects pro-forma FFO per share of 57-61 cents.

The Zacks Consensus Estimate for Q2 revenues is pegged at $244.5 million, indicating a year-over-year decline of 1.8%.

Earnings Whispers

Our proven model does not show that Aimco has the right combination of the two key ingredients — positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat in the quarter to be reported.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Aimco has an Earnings ESP of +3.70%.

Zacks Rank: Aimco carries an unfavorable Zacks Rank of 4 (Sell).

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

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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