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Is AvalonBay (AVB) Poised for a Beat This Earnings Season?

AvalonBay Communities Inc. AVB is slated to report first-quarter 2016 results after the market closes on Apr 27. Last quarter, this residential real estate investment trust (“REIT”) had delivered a positive surprise of 1.53%.

AvalonBay beat estimates in three out of four trailing quarters, with a positive average earnings surprise of 4.33%. The Zacks Consensus Estimate for first-quarter funds from operations (“FFO”) is currently $2.07 per share.

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

Why a Likely Positive Surprise?

Our proven model shows that AvalonBay is likely to beat estimates because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) to beat estimates, and AvalonBay has the right mix.

Zacks ESP: The Earnings ESP, which represents the percentage difference between the Most Accurate estimate of $2.11 and the Zacks Consensus Estimate of $2.07, is +1.93%. This is a major indicator of a likely positive surprise.

Zacks Rank: AvalonBay carries a Zacks Rank #3.

The combination of AvalonBay’s Zacks Rank #3 and positive ESP makes us reasonably confident of a positive surprise this season.

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

What's Driving the Better-than-Expected Earnings?

AvalonBay recently issued operating update for the first quarter of 2016. The company expects total rental revenue for established communities to grow 5.4–5.6% year over year for the first-quarter 2016. Further, for the first quarter, AvalonBay expects FFO per share in a range of $2.04–$2.10 and core FFO per share within $1.88–$1.94.

We expect this growth trend to continue at AvalonBay on the back of an improving demand from household formation and favorable demographics. Yet, the completion of a number of projects in its markets, which would lead to higher supply, raises our concern.

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:

Essex Property Trust Inc. ESS has an Earnings ESP of +1.14% and a Zacks Rank #2. The company will report results on Apr 28.

Taubman Centers, Inc. TCO has an Earnings ESP of +3.53% and a Zacks Rank #3. The company will release results on May 2.

Vornado Realty Trust VNO has an Earnings ESP of +2.44% and a Zacks Rank #3. The company will report first-quarter 2016 results on May 2.

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. All earnings per share numbers presented in this write up represent FFO per share.

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