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Realty Income's (O) Q4 FFO Beats Estimates, Revenues Up Y/Y

Zacks Equity Research

Realty Income Corporation’s O fourth-quarter 2018 adjusted funds from operations (FFO) per share of 79 cents surpassed the Zacks Consensus Estimate of 75 cents. The reported figure is also up 3.9% from the prior-year tally of 76 cents.

The company benefited from year-over-year growth in revenues and also enjoyed high occupancy levels.

Total revenues for the reported quarter came in at $342.6 million, up 10.3% year over year. However, the revenue figure narrowly missed the Zacks Consensus Estimate of $343.2 million.

For full-year 2018, adjusted FFO per share of $3.19 increased 4.2% from $3.06 witnessed in 2017. This was backed by 9.2% expansion in revenues to $1.3 billion.

Quarter in Detail

During fourth-quarter 2018, same-store rents on 4,629 properties under lease inched up 0.8% to $272.1 million from the prior-year quarter. Portfolio occupancy of 98.6% as of Dec 31, 2018, shrunk 20 basis points (bps) sequentially but was up 20 bps year over year.

Further, the company had 80 properties available for lease, out of a total of 5,797 properties in the portfolio as of Dec 31, 2018, compared with 71 properties as of Sep 30, 2018. Moreover, during the quarter, the company re-leased 62 properties to existing and new tenants, at a rent recapture rate of 93.7%.

Portfolio Activity

During the quarter under review, Realty Income invested $332.1 million in 180 new properties and properties under development or expansion, situated in 30 states. The assets are fully leased, with a weighted average lease term of around 16.2 years, and an initial average cash lease yield of 6.5%. However, only around 24% of the rental revenues from acquisitions reported during the quarter came in from investment grade-rated tenants and their subsidiaries.

On the other hand, the company sold 68 properties for $59.3 million, with a gain on sales of $5.8 million, during the Oct-Dec period.

Liquidity

Finally, Realty Income exited 2018 with cash and cash equivalents of $10.4 million, up from $6.9 million at the end of 2017. Furthermore, Realty Income raised $538.7 million from the sale of common stock, at a weighted average price of $63.05 per share, during the reported quarter.

In Oct 2018, the company entered in a new $3.25 billion unsecured credit facility to amend and restate its earlier $2.25 billion unsecured credit facility, of which $2.0 billion was scheduled for expiry in Jun 2019. The new credit facility comprises a $3.0 billion unsecured revolving credit facility and a new $250 million unsecured term loan due March 2024. Notably, as of Dec 31, 2018, Realty Income had a borrowing capacity of $2.75 billion on the revolving credit facility.

Outlook

For full-year 2019, Realty Income expects adjusted FFO per share in the range of $3.25-$3.31. The Zacks Consensus Estimate for the same is currently pegged at $3.30.

Our Take

Realty Income’s impressive fourth-quarter performance in terms of FFO per share is encouraging though the revenue miss is disappointing to some extent. Nevertheless, 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 business. Such businesses are less susceptible to economic recessions, as well as competition from Internet retailing. In addition, the company’s solid underlying real estate quality and prudent underwriting at acquisitions have helped maintain its high occupancy levels consistently. In addition, accretive acquisitions and solid balance-sheet strength augur well for long-term growth.

However, despite all these efforts, the prevalent retail apocalypse is likely to limit its growth momentum to some extent. The company has substantial exposure to single-tenant assets which raises its risks associated with tenant default.

Realty Income currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Realty Income Corporation Price, Consensus and EPS Surprise
 

Realty Income Corporation Price, Consensus and EPS Surprise | Realty Income Corporation Quote

We, now, look forward to the earnings releases of other REITs like Public Storage PSA, Outfront Media Inc. OUT and American Tower Corporation AMT, which are slated to report their quarterly numbers next week.

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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