AvalonBay (AVB) Q4 Earnings: Disappointment in the Cards?

AvalonBay Communities, Inc.AVB is slated to report fourth-quarter 2016 results after the market closes on Feb 1.

Last quarter, this Arlington, VA-based, residential real estate investment trust ("REIT") had delivered a negative surprise of 0.47%. However, over the trailing four quarters, the company surpassed estimates in two quarters, but missed on the other two occasions. This resulted in an average negative surprise of 0.21%.

The graph below depicts the surprise history of the company.

AvalonBay Communities, Inc. Price and EPS Surprise

AvalonBay Communities, Inc. Price and EPS Surprise | AvalonBay Communities, Inc. Quote

Over the past six months, shares of AvalonBay dipped 7.29%, comparatively lower than the REIT and Equity Trust - Residential industry's fall of 8.86%.

Will AvalonBay be able to overcome challenges this time and post a surprise? Or will a challenging backdrop in the residential real estate market hurt its financials this earnings season? Let's see how things have shaped up for this announcement.

Factors to Consider

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 AvalonBay.

However, supply issues in a number of markets have raised concerns for the residential REIT. In fact, per an early apartment data from the AXIOMetrics, national effective rent growth was 2.3% for fourth-quarter 2016. This was over 2 percentage points lower than the 4.6% rent growth experienced a year ago. In addition, occupancy of 94.7% in the fourth quarter was down from 95.1% in the third quarter and 95.0% in fourth-quarter 2015.

Higher supply usually curtails the landlord's capability to demand more rents and also brings down absorption. There is also a trend of increased concessions mainly in San Francisco and the New York City market. Amid these, the company's growth is anticipated to remain limited in the to-be-reported quarter, and pressure on rent growth and occupancy are likely to be reflected in the results.

For fourth-quarter 2016, AvalonBay expects its funds from operations (FFO) per share in the range of $2.06-$2.12 and core FFO per share in the range of $2.08-$2.14.

However, analysts remained bearish on the stock and reduced fourth quarter FFO per share estimates by 0.5%, over the past seven days, to $2.10.

Earnings Whispers

Our proven model does not conclusively show that AvalonBay will beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here, as you will see below.

Zacks ESP: The Earnings ESP, which represents the percentage difference between the Most Accurate estimate of $2.06 and the Zacks Consensus Estimate of $2.10, is -1.91%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: AvalonBay's Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.

We caution against stocks with Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

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

Ashford Hospitality Prime, Inc.AHP , slated to release earnings results on Feb 22, has an Earnings ESP of +16.67% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

CubeSmartCUBE , slated to release earnings results on Feb 16, has an Earnings ESP of +2.70% and a Zacks Rank #3.

STAG Industrial, Inc.STAG , scheduled to come up with its earnings release on Feb 16, has an Earnings ESP of +2.50% and a Zacks Rank #3.

Note: All EPS numbers presented in this write up represent funds from operations (FFO) per share. 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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