Will Escalating Supply Hurt Aimco (AIV) In Q3 Earnings?

Apartment Investment & Management Co. (NYSE:AIV) — commonly known as Aimco — is slated to report third-quarter 2017 results on Oct 26, after the market closes. While its funds from operations (FFO) per share are expected to grow year over year, revenues might witness a decline.

Last quarter, FFO of this residential real estate investment trust (REIT) surpassed the Zacks Consensus Estimate. Results display growth in same-store property NOI and increased contribution from development, redevelopment and acquisition communities. Lesser general and administrative costs, lower interest expense and other expenses also contributed to higher funds from operations. However, this positive was partially offset by the loss of income from apartment sales in 2016, reduced earnings from exiting the Asset Management business and lower tax benefits.

Nevertheless, Aimco has a mixed earnings surprise history. Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate in one occasion, reported in-line numbers in two and missed the mark in another. Overall, Aimco witnessed an average negative surprise of 0.03%. This is depicted in the chart below:

Apartment Investment and Management Company Price and EPS Surprise

In addition, year to date, shares of Aimco have underperformed the industry. While the company’s shares fell 3%, the industry recorded 3.4% growth during this time frame.


Note: All EPS numbers presented here represent funds from operations (FFO) per share.

Factors to Influence Q3 Results

Per a study by the real estate technology and analytics firm, RealPage, Inc. (NASDAQ:RP) , the U.S. apartment market reported stable rent growth, while occupancy remained healthy in the third quarter. Nonetheless, the levels of rent growth moderated from the earlier years. For new leases, effective rents inched up 0.9% during the quarter and 2.6% annually. Further, apartment occupancy for the third quarter came in at 95.5% across the nation’s top 100 metros.

Aimco has a solid portfolio — diversified both in terms of geography and price point. This will likely help the company meet the rise in demand for apartment properties from echo boomers — children of the baby-boomer generation — in the to-be-reported quarter.

Moreover, Aimco has been making concerted efforts to revamp its portfolio through property sales, and reinvesting the proceeds in select apartment homes with higher rents, superior margins and higher-than-expected growth.

Though the assets sale might enable the company penetrate higher-growth in-fill areas over the long term, the earnings dilution impact from such a move cannot be bypassed in the short run. This is expected to affect the company’s earnings in the quarter to be reported.

Further, there is an increasing apartment supply in a number of the company’s markets. This high supply is likely to put pressure on rental rates and adversely affect revenue growth in the to-be-reported quarter.

For third-quarter 2017, Aimco projects pro forma FFO per share in the band of 60-64 cents. The Zacks Consensus Estimate for the same is currently pegged at 62 cents. This estimate remained unchanged over the past two months, reflecting lack of any solid catalyst.

Earnings Whispers

Our proven model does not conclusively show that Aimco will likely beat estimates 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 at least 3 (Hold) for this to happen. However, that is not the case here as you will see below.

(You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.)

Zacks ESP: The Earnings ESP for Aimco is -1.41%.

Zacks Rank: Aimco’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.

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 time around:

Armada Hoffler Properties, Inc. (NYSE:AHH) , slated to release third-quarter results on Oct 31, has an Earnings ESP of +1.82% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Independence Realty Trust, Inc. (NYSE:IRT) , scheduled to report earnings on Oct 31, has a Zacks Rank #3 and an Earnings ESP of +7.04%.

Spirit Realty Capital, Inc. (NYSE:SRC) , set to report quarterly numbers on Nov 2, has an Earnings ESP of +3.07% and a Zacks Rank #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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