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Can AvalonBay's (AVB) Earnings Pull off a Surprise in Q3?

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AvalonBay Communities Inc.AVB is slated to report third-quarter 2015 results on Oct 26, after the market closes. Last quarter, this residential real estate investment trust ("REIT") had delivered a positive surprise of 13.54%.

AvalonBay beat estimates in three out of four trailing quarters, with a positive average earnings surprise of 5.55%. The Zacks Consensus Estimate for third-quarter funds from operations ("FFO") per share is currently $2.02.

Let's see how things are shaping up for this announcement.

Factors to Consider

AvalonBay is well-poised to report growth in the third quarter, amid rising demand backed by household formation and favorable demographics along its markets. The company has high-quality assets located in some of the premium markets of the U.S., which are expected to help it generate steady rental revenues.

Apart from this, demographic growth continues to be strong in the young-adult age cohort, which has a higher propensity to rent. In fact, a significant change in lifestyle has taken place and life-cycle events are getting delayed. This is leading to an extension of the average age of first-time homeownership.

Yet, elevated supply in a number of regions remains a concern. This is because higher supply usually curtails the landlord's capability to demand more rents and lesser absorption. Moreover, in certain urban submarkets, a significant amount of new supply is delivered compared to the suburban submarkets. This is leading to a slowdown in urban growth rates.

Earnings Whispers

Our proven model does not conclusively show that AvalonBay will beat on earnings 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. This is not the case here as you will see below.

Zacks ESP: AvalonBay has an earnings ESP -0.50%. That is because the Most Accurate estimate stands at $2.01 while the Zacks Consensus Estimate per share is pegged at $2.02.

Zacks Rank: Though the company's Zacks Rank #2 increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise.

Please note that we caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks That Warrant a Look

Here are some stocks in the REIT industry that you may want to consider, as our model shows they have the right combination of elements to post an earnings beat this quarter:

Essex Property Trust Inc. ESS carries a Zacks Rank #2 and has an Earnings ESP of +0.82%. It is scheduled to report results on Oct 29.

Mid-America Apartment Communities Inc. MAA has an Earnings ESP of +0.75% and a Zacks Rank #2. The company will report third-quarter results on Oct 28.

Hospitality Properties Trust HPT has an Earnings ESP of +1.08% and a Zacks Rank #2. The company will report third-quarter results on Nov 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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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

AVALONBAY CMMTY (AVB): Free Stock Analysis Report

MID-AMER APT CM (MAA): Free Stock Analysis Report

ESSEX PPTY TR (ESS): Free Stock Analysis Report

HOSPITALITY PRP (HPT): Free Stock Analysis Report

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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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