AvalonBay Communities, Inc. AVB is slated to report first-quarter 2017 results after the market closes on Apr 26.

Last quarter, this Arlington, VA-based, residential real estate investment trust (“REIT”) delivered a positive surprise of 0.95%. Growth in net operating income (NOI) from newly developed and existing operating communities attributed to this increase. However, this benefit was partly offset by a rise in interest expense.

Over the trailing four quarters, the company surpassed estimates in two quarters, however missed in the other two occasions. This resulted in an average negative surprise of 0.35%. 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. Quote

Let’s see how things have shaped up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that AvalonBay is likely to beat on 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 at least 3 (Hold) to beat estimates, and AvalonBay has the right mix.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 
Zacks ESP: The Earnings ESP, which represents the percentage difference between the Most Accurate estimate of $2.12 and the Zacks Consensus Estimate of $2.11, is +0.47%. This is a meaningful and leading indicator of a likely positive surprise.

Zacks Rank: AvalonBay’s Zacks Rank #3, when combined with a 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) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

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

AvalonBay is well poised to grow on the back of a rising demand from household formation and favorable demographics. Moreover, increasing consumer confidence, on the back of job growth, rising wages and a healthier balance sheet, promise strong prospects for the company.

Notably, in Mar 2017, AvalonBay declared an uptick in its rental revenue outlook for first-quarter 2017. Specifically, the company had estimated first-quarter 2017 total rental revenue for established communities to grow 3.1–3.2% over the prior-year period. At the midpoint, this denoted an expansion of around 25 basis points from the figure projected earlier when the company issued the full-year rental revenue growth outlook for established communities on Feb 1.

Admittedly, completion of a number of projects in its markets, leading to higher supply, is a concern as elevated supply usually leads to lesser absorption, curtails the landlord’s capability to demand more rents and results in a rise in concession activity. However, amid this, increase in rental revenue outlook is encouraging, and reaffirms the company’s fundamental strength and stability.

During the fourth-quarter 2016 earnings release, the company revealed its funds from operations (FFO) per share guidance for first-quarter 2017. AvalonBay estimated FFO per share in the range of $2.09–$2.15 and core FFO per share in the band of $2.06–$2.12.

In addition, over the past three months, shares of AvalonBay outperformed the Zacks categorized REIT and Equity Trust – Residential industry. While AvalonBay logged in a gain of 7.7%, the industry climbed 3.9% over this period.

However, over the past seven days, the Zacks Consensus Estimate for first-quarter FFO per share fell 0.5% to 2.11.

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 they have the right combination of elements to report a positive surprise this quarter:

Boston Properties Inc. BXP, slated to release first-quarter results on Apr 25, has an Earnings ESP of +0.67% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Public Storage PSA, scheduled to release earnings on Apr 26, has an Earnings ESP of +0.41% and a Zacks Rank #3.

EPR Properties EPR, slated to release earnings on May 2, has an Earnings ESP of +0.84% and a Zacks Rank #3.

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.

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