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Realty Income (O) to Report Q3 Earnings: What's in Store?

Zacks Equity Research

Realty Income Corp. O is scheduled to report third-quarter 2019 results after market close on Nov 4. The company’s results are anticipated to reflect year-over-year increase in both revenues and funds from operations (FFO) per share.

In the last reported quarter, this monthly dividend-paying real estate investment trust (REIT) delivered a positive surprise of 1.23% in terms of FFO per share. The company benefited from year-over-year growth in revenues as well as recorded modest same-store rent growth.

Realty Income has a decent surprise history. Over the trailing four quarters, the company surpassed estimates on each occasion, the average positive beat being 2.90%. This is depicted in the graph below:

Realty Income Corporation Price and EPS Surprise
 

Realty Income Corporation Price and EPS Surprise

Realty Income Corporation price-eps-surprise | Realty Income Corporation Quote

Notably, this retail REIT derives more than 90% of its annualized retail rental revenues from tenants belonging to service, non-discretionary and low-price retail businesses. Such businesses are less susceptible to economic recessions, as well as competition from Internet retailing. This is expected to have been conducive to its cash flow in the third quarter.

Moreover, low unemployment, increasing wages and decent consumer sentiment are positive indicators for the retail industry. This is anticipated to have sent positive ripple effects across the industry in the to-be-reported quarter.

Furthermore, the company focuses on external growth through exploring accretive acquisition opportunities. Healthy property acquisition volume at decent investment spreads is likely to have driven the company’s quarterly performance.

Notably, during the third quarter, the company announced that it has agreed to acquire 454 single-tenant retail properties from CIM Real Estate Finance Trust, Inc. for around $1.25 billion in cash. The deal, expected to take place in a number of tranches with majority of the buyouts taking place this year, will be immediately accretive on a leverage-neutral basis, per the company’s management.

Moreover, Realty Income’s solid underlying real estate quality and prudent underwriting at acquisition have helped the company maintain high occupancy levels consistently. Since 1996, the company’s occupancy level has not moved below 96%. This trend is likely to have continued in the quarter under review as well. Further, same-store rent growth is expected to display limited operational volatility.

Amid these, the Zacks Consensus Estimate for third-quarter revenues is pegged at $375.8 million, indicating a rise of 11.2% from the year-ago reported figure. Further, the Zacks Consensus Estimate for the third-quarter FFO per share is currently pinned at 83 cents. This indicates a 2.5% increase from the year-ago quarter.

Nonetheless, despite all these efforts, the choppy retail real estate environment might limit its growth momentum to some extent as secular industry headwinds, including retailer downsizing and tenant bankruptcies have been dampening the industry fundamentals.

Moreover, prior to the September-end quarter earnings release, there is lack of any solid catalyst. As such, the Zacks Consensus Estimate of FFO per share for the quarter remained unchanged at 83 cents over the past month.

Here is what our quantitative model predicts:

Our proven model predicts a positive surprise in terms of FFO per share for Realty Income this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of a FFO beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Realty Income carries a Zacks Rank #2 and has an Earnings ESP of +0.33%.

Other Stocks That Warrant a Look

Here are a few other 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 quarter:

Stag Industrial, Inc. STAG, scheduled to release earnings on Oct 30, has an Earnings ESP of +3.30% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Simon Property Group, Inc. SPG, slated to report third-quarter results on Oct 30, has an Earnings ESP of +0.28% and a Zacks Rank of 3.

Apartment Investment and Management Company AIV, set to release quarterly numbers on Oct 31, has an Earnings ESP of +0.6% and carries a Zacks Rank of 3, currently.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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