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What to Expect From AvalonBay (AVB) This Earnings Season?

AvalonBay Communities, Inc. AVB is slated to report third-quarter 2020 results on Oct 28, after the market closes.The company’s results will likely reflect year-over-year declines in revenues and funds from operations (FFO) per share.

In the last reported quarter, this residential real estate investment trust (REIT) reported a negative surprise in terms of FFO per share. Results reflected uncollectible lease revenues from residential and retail properties as well as decline in economic occupancy.

Over the last four quarters, the company surpassed estimates on one occasion and missed in the other three, the average negative surprise being 0.12%. 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. price-eps-surprise | AvalonBay Communities, Inc. Quote

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

Factors to Consider

The U.S. apartment leasing rebounded during the third quarter. This bouncing back was mainly driven by the increase in leasing activity in the Sun Belt region. It also indicates the occurrence of job growth after the slump earlier in the year, which facilitated new household formation reappearance in a number of markets.

Per the latest report from real estate technology and analytics firm RealPage RP, across the 150 largest U.S. markets, the occupied apartment count increased 146,517 units, on net, during the July-September quarter. This marks the largest third-quarter demand figure since before the Great Recession. Moreover, product absorption pace in the third quarter was more than four times the minimal demand for about 34,000 apartments recorded in the second quarter, according to the same report.

However, this bouncing back was not uniform. Though the Sun Belt markets staged a recovery, a number of gateway markets suffered net move-outs during the to-be-reported quarter, and urban core neighborhoods still struggled.

In the Sep 11 operational update, AvalonBay noted that average physical occupancy and rent were affected for its established communities. Particularly, the average physical occupancy for July and August combined was 93.3%, reflecting a decline from the second quarter’s 94.6%. Moreover, like-term lease rent change was a negative 2.5% in July and August combined compared with the decline of 0.4% during the June-end quarter. Also, like-term effective rent change was a negative 4.8% in July and August combined compared with the second quarter’s 3.1% decline.

The pandemic has resulted in macroeconomic uncertainties and a tepid job-market environment, in turn, causing household contraction and consolidation. Apart from these, a number of factors have been affecting rental demand, including the coronavirus pandemic and the work-from-home trend, resulting in a shift of some renter demand away from higher cost and urban/infill markets. In addition, record-low mortgage rates and the desire for spaces are driving home sales and adversely impacting rental demand. Furthermore, use of concessions is likely to be rampant amid a slowdown in demand.

AvalonBay too witnessed a decline in average physical occupancy of its urban communities to 90.5% in July and August combined, from 93.6% in the second quarter. Like-term effective rent change was a negative 8% in July and August combined compared with the second quarter’s 4.3% decline. For sub-urban communities, average physical occupancy shrunk marginally to 94.4% in July and August combined compared with 95% for the second quarter, while like-term effective rent change was a negative 3% in July and August combined compared with the June-end quarter’s 2.6% decline.

Amid these, the Zacks Consensus Estimate of $563 million for third-quarter revenues suggests a 4.2% year-over-year decrease.

Nevertheless, the company witnessed decent collection of rents for its residential properties with receipts inching closer to the pre-COVID collection rate. As of Sep 9, the company’s September collections reached 95% of its average monthly residential collections percentage for AvalonBay’s established communities as of the ninth day of the month for each of the months in the 12-month period ended Mar 31, 2020. Moreover, as of the end of each July and August, its residential collections as a percentage of billed rents for established communities marked 96% of its average monthly established communities residential collections percentage at month end for the 12-month period ended Mar 31, 2020.

Notably, AvalonBay has high-quality assets located in some of the premium markets of the country and is banking on technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio.The company is also likely to retain its balance-sheet strength.

Prior to the third-quarter earnings release, analysts seem to have become slightly optimistic about the company’s prospects as the Zacks Consensus Estimate for the July-September quarter FFO per share moved a cent north to $2.15 over the past month. However, it suggests a year-over year decline of 8.1%.

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 #3 (Hold) and has an Earnings ESP of -0.62%.

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:

National Storage Affiliates Trust NSA, scheduled to report quarterly numbers on Nov 5, currently has an Earnings ESP of +2.44% and carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

EastGroup Properties, Inc. EGP, slated to release third-quarter earnings on Oct 27, has an Earnings ESP of +0.80% 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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AvalonBay Communities, Inc. (AVB): Free Stock Analysis Report
 
RealPage, Inc. (RP): Free Stock Analysis Report
 
EastGroup Properties, Inc. (EGP): 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.

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