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Realty Income (O) to Post Q3 Earnings: A Surprise in Store?

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Zacks Equity Research
·6 min read
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Realty Income Corp. O is scheduled to report third-quarter 2020 numbers on Nov 2, after the bell. While the company’s results are anticipated to reflect year-over-year increase in revenues, funds from operations (FFO) per share might have remained flat.

In the last reported quarter, this monthly dividend-paying real estate investment trust (REIT) delivered a positive surprise of 13.16% in terms of FFO per share. Per management, second-quarter operating results “continue to demonstrate the stability and resiliency” of the company’s business.

Realty Income has a decent surprise history. Over the trailing four quarters, the company surpassed estimates on three occasions and met in the other, the average beat being 5.08%. 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 and EPS Surprise

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

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

Factors to Consider

The retail real estate market had already been battling dwindling traffic issues, store closures and retailer bankruptcies, and now the pandemic has only added to its woes. Despite retail sales rebounding to the pre-COVID levels during the July-September period, with improvement in consumer sentiment, per a report from CBRE Group CBRE, the total retail availability rate expanded 20 basis points (bps) to 6.6% in the quarter, signaling the weakening retail real estate fundamentals.

Particularly, experience-based retail, including full-service restaurants, fitness centers and movie theaters has been affected the most. Negative net absorption aggregated nearly 15 million square feet. This was mainly in the neighborhood, community & strip center segment, and represented the largest decline since the first quarter of 2009. Also, construction completions of less than 6 million square feet marked the lowest quarterly total ever recorded.

Nevertheless, Realty Income’s essential retail tenants in its roster have been the saving grace during this crisis. The company’s top four industries (reflecting 37.5% of the annualized rent) — which are convenience stores (accounting for 12% rental revenues for second-quarter 2020), drug stores (9.1%), dollar stores (8.1%) and grocery stores (8%) — sell essential goods and continue to flourish even amid the pandemic. The company received 99.7% of rent due from tenants in these industries for September, as well as for the second and third quarters, per management’s business update.

Across Realty Income’s total portfolio, as of Oct 1, contractual rent receipts improved to 93.8% for September from 93.6% for August, 92.5% for July and 88.3% for the second quarter. Rent collections from its investment-grade rated tenants, which account for 48% of the annualized rental revenues, were already 100% for September, compared with August’s 99.9%. This compares with 100% for July and 99.4% for the June-end quarter.

Further, the company’s top 20 tenants, who represent 52.8% of the annualized rental revenues, paid 91.9% of the contractual rent due for September, up from the 91.7% of the contractual rent due for August, 90.9% due for July and 82.9% due for the second quarter.

For the third quarter, the company has received 93.3% of contractual rent across total portfolio, 91.5% of contractual rent from top 20 tenants and 100% of contractual rent from investment grade tenants.

The Zacks Consensus Estimate for quarterly revenues is pegged at $408.3 million, suggesting a 9.1% increase from the year-ago quarter.

Nevertheless, retail businesses depend on customer traffic and consumers are avoiding gathering in large public spaces due to the pandemic. This has taken a toll on tenants’ liquidity who are unable to meet rental obligations.

For Realty Income, the company’s tenants from theater as well as health and fitness have been adversely impacted by the government-mandated closures and social-distancing requirements. As of Oct 1, the theater industry represents roughly 62% of the uncollected third-quarter rent and 57% of uncollected September rent.

Realty Income’s activities during the soon-to-be-reported quarter were adequate to gain analysts’ confidence. The Zacks Consensus Estimate for the third-quarter FFO per share moved up a cent to 83 cents in a month’s time. However, it indicates no year-on-year movement.

Realty Income has also emerged as a company with decent financial health through its efforts to boost balance-sheet strength. This trend is likely to have continued in the third quarter as well. Moreover, situations have improved now and with the vast majority of Realty Income’s retail locations now being open, rent collection trends are likely to improve further. In fact, as of Sep 30, 2020, 98% of its total retail portfolio stores are now open and these represent nearly 84% of its contractual rents.

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 currently carries a Zacks Rank #3 and has an Earnings ESP of +2.91%.

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

Lexington Realty Trust LXP, set to report quarterly numbers on Nov 5, currently has an Earnings ESP of +1.33% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

National Storage Affiliates Trust NSA, slated to release third-quarter earnings on Nov 5, has an Earnings ESP of +1.94% and carries a Zacks Rank of 3 at present.

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

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Lexington Realty Trust (LXP) : Free Stock Analysis Report
Realty Income Corporation (O) : Free Stock Analysis Report
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CBRE Group, Inc. (CBRE) : Free Stock Analysis Report
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