What's in Store for AvalonBay (AVB) This Earnings Season?

AvalonBay Communities, Inc. AVB is slated to report third-quarter 2021 earnings on Oct 27, after the market closes. While the company’s results will likely display a year-over-year decline in the funds from operations (FFO) per share, revenues might marginally increase.

In the last reported quarter, this residential real estate investment trust (REIT) reported a surprise of 2.59% in terms of FFO per share. Results were backed by the better-than-anticipated top-line figure.

Over the last four quarters, the company surpassed estimate on two occasions for as many misses, the average negative surprise being 1.22%. 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 prior to this announcement.

Factors to Consider

For the U.S. apartment market, the third quarter appeared to be robust this year, with renter demand continuing to surge significantly. The number of occupied apartments was up 255,094 units, per a report depicting preliminary calculations from the real estate technology and analytics firm RealPage. This marked the biggest quarterly product absorption figure observed in the database that go back to the early 1990s. As of third-quarter 2021, the annual demand volume reached a whopping 597,354 units. Increase in occupied apartments over the past year surpassed the previous results.

After living with parents during the initial days of the pandemic, young adults are now forming new households. A better job market, particularly for the high-paying employment sectors than in the low-wage positions, is triggering demand for luxury units. In addition, rising home prices and limited inventory levels in the for-sale sector are hindering the conversions to homeownership and stoking rental housing demand. In terms of markets, product absorption continued in the Sun Belt and other non-gateway metros. What’s grabbing attention is the large product absorption in the gateway metros, reflecting healthy rental demand.

The current favorable environment is boosting the occupancy levels and in turn, pushing up rents. Rent growth has also been widespread.

AvalonBay too, with its high-quality assets located in some of the premium markets of the country, is likely to have benefited from the favorable environment. In the third-quarter operating update, the residential REIT raised its third-quarter total residential rental revenue projection for the same-store communities on lower-than-expected uncollectible lease revenues, and better-than-anticipated effective lease rates and occupancy. This residential REIT witnessed higher-than-anticipated delinquent rent payments from the COVID-19 rental assistance programs.

AvalonBay noted that it expects total residential rental revenues for the same-store communities to inch up 0.9-1.1% from the prior-year period. At the mid-point, this is 180 basis points (bps) higher than the forecast issued on Jul 28.

While the total average physical occupancy of 96.3% in September is flat with the August level, it is up 30 bps from July and 40 bps from the second quarter. Also, the average like-term effective rent change of 11% in September increased from August’s 8.1%, July’s 5% and the second quarter’s negative 1.3%.

AvalonBay also witnessed an increase in the average move-in rent value, which, in September 2021 (as of Sep 22), was roughly 24% above the December 2020 level and 6% ahead of the September 2019 mark.

During the third quarter, the company also acquired a number of properties. In Flower Mound, TX, it acquired The Nexus Lakeside for around $117 million. In Charlotte, NC, the company acquired Hub South End for nearly $104 million and Three 30 Five for roughly $53 million.

The Zacks Consensus Estimate of $570.55 million for the third-quarter revenues suggests a 0.56% year-over-year increase. Established community-economic occupancy is projected at 96% for the quarter, while the average rental rates are estimated to be $2,598, calling for growth from the prior quarter’s $2,450.

Moreover, the company is banking on technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio. It is also likely to retain its balance-sheet strength.

Prior to the quarterly earnings release, analysts seem to be optimistic about the company’s prospects as the Zacks Consensus Estimate for the July-September quarter FFO per share has moved marginally north to $1.99 over the past month. However, it suggests a year-over year decline of 3.4%.

AvalonBay’s earnings might reflect the adverse impact of the pandemic on its business, year over year, though the gap is expected to have narrowed. Also, a high apartment supply adds to its woes.

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 and has an Earnings ESP of -0.06%.

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:

Equity Residential EQR, scheduled to report third-quarter earnings on Oct 26, currently has an Earnings ESP of +1.19% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Essex Property Trust, Inc. ESS, slated to report quarterly numbers on Oct 26, currently has an Earnings ESP of +0.27% and carries a Zacks Rank of 2.

Camden Property Trust CPT, slated to release quarterly numbers on Oct 28, has an Earnings ESP of +0.43% and has a Zacks Rank of 2, 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

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