Residential REITs' Q3 Earnings On Oct 27: ESS, MAA And More

The Q3 earnings season for the real estate investment trusts (REIT) is in full swing. Several of the residential REITs, like Apartment Investment and Management Company (NYSE:AIV) , Camden Property Trust (NYSE:CPT) , Essex Property Trust Inc. (NYSE:ESS) and Mid-America Apartment Communities Inc. (NYSE:MAA) , are slated to release their third-quarter figures on Oct 27.

So far, reputed residential REITs – AvalonBay Communities, Inc. (NYSE:AVB) and Equity Residential (NYSE:EQR) – have reported their third-quarter earnings. While AvalonBay slightly fell short of expectations in the quarter, Equity Residential managed to meet estimates.

Importantly, the national apartment market has been experiencing a moderation in recent quarters, post the robust performances of 2014 and 2015, thanks to the new supply in the high-rent metros. Also, there seems to be no respite from it anytime soon with the trend projected to continue next year.

Going by statistics, in the third quarter, the average effective rent nationwide was $1,289 per unit per month as against $1,251 in the prior-year quarter, reflecting growth of 3% year over year, per an Axiometrics study. This marked a decrease from the solid 5.2% rent growth experienced a year ago as well as denoted the fourth straight quarter in which the annual rent-growth rate declined. Also, occupancy level was 95.1% in third-quarter 2016, down from 95.2% in Q2 2016 and 95.4% in the year-ago quarter.

Markets with high rents like San Francisco, New York and San Jose have been highly affected and the high end and luxury apartment categories have been flooded with new supply. Though there has been a rise in jobs, the pace has decelerated over the past year. As a result, landlords were compelled to maintain low rents, in order to remain competitive. Along with this, job losses in the energy sector also weighed on the Houston market.

However, market fundamentals are still steady in the mid-range markets. Also, despite the moderation, the market has been consistently rendering above the long-term average performance.

Amid this, surprises might be in store for some of the residential REITs, in the quarter under review, despite a challenging environment stemming from the rising supply. Let’s take a look at the four REITs, scheduled to release their third-quarter results on Oct 27.

Apartment Investment and Management Company, commonly known as Aimco, has an Earnings ESP of 0.00% and a Zacks Rank #4 (Sell).

Our proven model does not conclusively show that Aimco is likely to beat on earnings this quarter. This is because the company lacks the right combination of the two key ingredients – a positive Earnings ESP (the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate) and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). 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.

Aimco has a solid portfolio, diversified both in terms of geography and price point. The company is revamping its portfolio through property sales and reinvesting the proceeds in select apartment homes with higher rents, superior margins and greater-than-expected growth. While it is a strategic fit on part of the company to sell its non-core assets and buy property in higher-growth infill areas, the dilutive impact on earnings from such asset dispositions cannot be avoided either in the near term. (Read more: Aimco Q3 Earnings: What's in Store this Season?)

Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

Camden Property Trust has a Zacks Earnings ESP of 0.91% and a Zacks Rank #3. Notably, a positive ESP is a major indicator of a likely positive surprise. Moreover, this combination of its Zacks Rank #3 and positive ESP makes us reasonably confident of a positive surprise this season.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Essex Property Trust has an Earnings ESP of -0.36% and a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, the company’s negative ESP makes surprise prediction difficult.

Essex has a strong property base and a sturdy balance sheet. In fact, it also enjoys a solid scale in the West Coast market. However, high supply in some of its markets is estimated to restrict the company’s growth, hindering a rise in rent and occupancies in the to-be-reported quarter. (Read more: Essex Property Q3 Earnings: What's in the Cards?)

Mid-America Apartment Communities Inc. has a Zacks Rank #3 and an Earnings ESP of + 0.67%. This stock is likely to post a surprise this quarter as it has the right combination of a favorable Zacks rank and positive ESP.

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