AvalonBay Communities, Inc. AVB is slated to report second-quarter 2020 results on Jul 29, after the market closes. While the company’s quarterly results will likely reflect growth in revenues, funds from operations (FFO) per share might display a decline.
In the last reported quarter, this residential real estate investment trust (REIT) posted a negative surprise in terms of FFO per share.
Over the last four quarters, the company surpassed estimates on one occasion and missed in the other three, the average negative surprise being 0.33%. The graph below depicts the surprise history of the company:
AvalonBay Communities, Inc. Price and EPS Surprise
AvalonBay Communities, Inc. price-eps-surprise | AvalonBay Communities, Inc. Quote
Let’s see how things have shaped up for this announcement.
Factors to Consider
The prime leasing season for the U.S. apartment market did not have a favorable start this time. This is because the coronavirus crisis has impacted the economy and substantial job cuts in the beginning of the April-June period affected leasing activity.
Per the latest report from real estate technology and analytics firm RealPage RP, the June-end quarter witnessed demand for just 33,966 units across the country’s 150 largest markets. This marks roughly one-fourth of the average apartment product absorption realized in the second quarter in the past five years.
Majority of the demand was seen in June, as leasing activity in several locations were limited in the previous months. Moreover, the Sun Belt markets topped the second-quarter apartment demand. However, a number of gateway markets suffered net move-outs during the to-be-reported quarter, and urban core neighborhoods struggled the most.
Amid these, the performance of AvalonBay is likely to have been affected. In the Jun 1 operational update, the company noted that through May 31, its billed residential rent collections for the month marked 95% of the company’s average billed residential rent collections rate at month end for the 12-month period ending Mar 31, 2020.
The company also noted that average physical occupancy in May was 94.4% for its established communities, marginally down from April’s 95.3%. Moreover, like-term lease rent change was 0.2% in May compared with April’s 1.9%, while like-term effective rent change was -3.5% in the month versus the -0.2% reported in April.
Nevertheless, AvalonBay has high-quality assets located in some of the premium markets of the country. The company’s properties generally command the highest rents in its markets. Furthermore, the company is banking on technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio. This has become all the more essential in this social-distancing era, as the virus outbreak needed a quick shift to virtual operations for the continuity of normal business operations.
The Zacks Consensus Estimate of $590.7 million for second-quarter revenues suggests a 2.3% year-over-year increase. Established community economic occupancy is expected to be around 96%. The company is also likely to retain its balance-sheet strength.
Prior to the second-quarter earnings release, analysts seem to have become slightly optimistic about the company’s prospects as the Zacks Consensus Estimate for the April-June quarter FFO per share moved 2.8% north to $2.24 over the past month. However, it suggests a year-over year decline of 1.3%.
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 -0.28%.
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:
SBA Communications Corporation SBAC, set to report quarterly numbers on Aug 3, currently has an Earnings ESP of +4.48% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Iron Mountain Incorporated IRM, slated to release second-quarter earnings on Aug 6, has an Earnings ESP of +4.76% 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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