Realty Income (O) To Report Q1 Earnings: What's In Store?

Realty Income Corp. (NYSE:O) is scheduled to report first-quarter 2019 results after market close on May 1. The company’s results are anticipated to reflect year-over-year increase in 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 5.3% in terms of FFO per share. The company benefited from year-over-year growth in revenues and also witnessed high occupancy levels.

Over the trailing four quarters, Realty Income surpassed estimates on three occasions and met in the other, resulting in average positive surprise of 2.28%. This is depicted in the graph below:

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

Factors to Consider

Realty Income’s portfolio is well diversified with respect to tenant, industry, geography and property type. Further, this freestanding 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 contribute to its cash flow in the first quarter.

In addition, the healthy U.S. economy and job market gains are important catalysts for the retail real estate industry’s growth. Consumer confidence is getting a boost, fueled by job growth and rising wages, thereby spurring demand for retail goods. This is anticipated to have sent positive ripple effects across the industry in the to-be-reported quarter.

In addition, the company focuses on external growth through exploring accretive acquisition opportunities. Healthy property acquisition volume at decent investment spreads will likely aid the company’s first-quarter performance.

Realty Income’s solid underlying real estate quality and prudent underwriting at acquisition have also 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 to-be-reported quarter as well. Further, same-store rent growth is likely to exhibit limited operational volatility.

These are anticipated to lead to higher quarterly revenues. In fact, the Zacks Consensus Estimate for first-quarter revenues is pegged at $347.6 million, indicating a rise of 9.2% from the year-ago reported figure.

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 are continuing to affect the industry fundamentals.

Recent data from Reis shows that the neighborhood and community shopping center vacancy rate remained flat in the first quarter at 10.2%, but marginally inched up from prior year’s 10%. Additionally, the regional mall vacancy rate witnessed an uptick of 0.3% to 9.3% during the quarter. Nonetheless, national average asking rent and effective rent inched up 0.4% on a sequential basis and 1.6% year over year.

In addition, Realty Income has substantial exposure to single-tenant assets which raises its risks associated with tenant default.

Further, prior to the first-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 80 cents over the past month. Nevertheless, the figure indicates a 1.3% increase from the year-ago reported figure.

Here is what our quantitative model predicts:

Realty Income does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

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

Earnings ESP: The Earnings ESP for Realty Income is 0.00%.

Zacks Rank: Realty Income has a Zacks Rank of 3 (Hold), which increases the predictive power of ESP. However, we also need a positive ESP to be confident of a positive surprise.

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 quarter:

Alexandria Real Estate Equities, Inc. (NYSE:ARE) , scheduled to release earnings on Apr 29, has an Earnings ESP of +0.30% and currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Welltower, Inc. (NYSE:WELL) , scheduled to release earnings on Apr 30, has an Earnings ESP of +0.09% and a carries a Zacks Rank of 3.

Mack-Cali Realty Corporation (NYSE:CLI) , slated to report first-quarter results on May 1, has an Earnings ESP of +1.63% and holds a Zacks Rank of 3.

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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