Macro scenario of the sector
The residential REIT sector is on the threshold of a transition period, and the performance of these stocks depends a lot on the macroeconomic as well as industrial changes taking place currently.
While on the one hand, the real estate industry is experiencing moderate rent growth due to the ramp-up of housing starts in the market, the supply is still lower than the demand for apartments, particularly in Class A cities. Thus, these regions are now experiencing rent growth above the average level, which is expected to continue for the next few months as well.
Further, the US economy is buzzing with optimism mainly due to President Trump’s pro-American agenda. A record low level of unemployment, lower gas prices, and a growing GDP is prompting consumers to spend more on luxuries, which could lead to consumers paying for premium apartments in the Class A cities. However, the rising rate of interest may pose a threat to the future profitability of these companies, as it will increase their cost of debt. Let’s look at the guidance provided by the three residential REITs for the rest of the year.
AvalonBay Communities (AVB) is confident about its business momentum and expects to continue its growth trajectory for the rest of the year. It expects to report higher core FFO (funds from operations) in the range of $2.14 to $2.20 during 2Q17 compared to $2.09 per share reported during 2Q17.
AvalonBay, however, lowered its fiscal 2017 outlook during the second quarter conference call. It expects core FFO of $8.50–$8.70 per share. The new projection reflects 5% growth year-over-year compared to the 5.5% growth expected previously. Lower net operating income and higher operating expenses expected during the second half of the year have prompted management to lower its profit outlook for 2017.
Equity Residential’s year ahead
Equity Residential (EQR) now expects FFO to be in the range of $0.77 to $0.81 per share for 3Q17, higher than the $0.77 reported in 2Q17. The upbeat profit is expected to be driven by higher same-store NOI, higher lease-up NOI, and lower corporate expenses.
Equity Residential raised its FFO guidance for fiscal 2017 during the second quarter conference call. It expects fiscal FFO to be in the range of $3.09 to $3.15 compared to the $3.06 to $3.16 expected previously. The higher profit reflects gains anticipated due to higher same-store NOI.
What lies ahead for ESS?
After surpassing expectations during 2Q17, Essex Property (ESS) management is optimistic about the momentum of its business and expects to post profit and sales growth in the upcoming months. Thus, ESS raised its FFO guidance for fiscal 2017. The company now expects to report core FFO in the range of $11.70 to $11.96 compared to a range of $11.56 to $11.96 reported earlier. Revenue is expected to grow 3.6% compared to the 3.5% expected earlier.
These REITs and Boston Properties (BXP) together make up almost 18% of the iShares Cohen & Steers (ICF) REIT ETF. The ETF with its diversified portfolio provides a cushion to investors from volatility.