Will AvalonBay (AVB) Stock Suffer Post Q2 Earnings Results?

AvalonBay Communities, Inc. (NYSE:AVB) is slated to report second-quarter 2016 results after the market closes on Jul 25. Last quarter, this residential real estate investment trust (“REIT”) had delivered a positive surprise of 0.98%.

AvalonBay beat estimates in three out of four trailing quarters, with a positive average surprise of 3.89%. The Zacks Consensus Estimate for second-quarter funds from operations (“FFO”) is currently $2.08 per share.

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

Factors to Consider

AvalonBay is well poised to grow on the back of an improving demand from household formation and favorable demographics. In fact, amid the dismal residential real estate market in June, following Equity Residential’s (NYSE:EQR) guidance cut for weakness in New York and San Francisco portfolio, AvalonBay revealed that it expects its second-quarter rental revenue for established communities to grow at a pace that is consistent with its earlier projections.

Specifically, the company said that total rental revenue for the second quarter for established communities is expected to increase around 4.9–5.1% over the prior-year period. Further, for the second-quarter 2016, AvalonBay expects FFO per share in the range of $2.07–$2.13 and core FFO per share within $1.97–$2.03.

However, the completion of a number of projects in its markets, which would lead to higher supply, raises our concern. This is because higher supply usually curtails the landlord’s capability to demand more rents and also brings down absorption. In fact, though the DC market is showing modest improvement, New York and Northern California regions are witnessing deceleration amid new supply, which remains a concern.

AVALONBAY CMMTY Price and EPS Surprise

AVALONBAY CMMTY Price and EPS Surprise | AVALONBAY CMMTY Quote

Earnings Whispers?

Our proven model does not conclusively show that AvalonBay will beat on earnings this season. 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. However, 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 $2.02 and the Zacks Consensus Estimate of $2.08, is -2.89%.

Zacks Rank: AvalonBay currently has a Zacks Rank #2 (Buy). Though a favorable Zacks Rank increases the predictive power of ESP, the company’s negative ESP makes our surprise prediction difficult.

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

Stocks to Consider

Here are a few stocks in the REIT sector you may want to consider, as our model shows that they have the right combination of elements to post a positive surprise this quarter:

American Campus Communities, Inc. (NYSE:ACC) has an Earnings ESP of +1.89% and a Zacks Rank #2. The company will report results on Jul 25.

Regency Centers Corporation (NYSE:REG) has an Earnings ESP of +1.25% and a Zacks Rank #3. The company will release results on Aug 2.

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.