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What's in the Cards for Realty Income's (O) Q4 Earnings?

Zacks Equity Research

Realty Income Corp. O is scheduled to report fourth-quarter 2018 results after the market closes on Feb 20. The company’s results are anticipated to reflect year-over-year increase in revenues, while its funds from operations (FFO) per share might witness a decline.

In the last reported quarter, this monthly dividend-paying real estate investment trust (REIT) delivered a better-than-expected performance in terms of FFO per share. The company benefited from year-over-year growth in revenues and also enjoyed high occupancy levels.

Notably, Realty Income has a mixed surprise history. The company surpassed estimates in two occasions, met in another and missed in the other, over the trailing four quarters, resulting in average positive surprise of 0.63%. This is depicted in the graph below:

Realty Income Corporation Price and EPS Surprise
 

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

For full-year 2018, Realty Income expects adjusted FFO per share of $3.18-$3.21. The Zacks Consensus Estimate for the same is currently pinned at $3.13.

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

Factors to Consider

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. Moreover, the company’s portfolio is well diversified with respect to tenant, industry, geography, and property type, which contributes to the stability of its cash flow.

In addition, the healthy U.S. economy and job-market gains are important catalysts for the retail real estate industry’s growth. Particularly, increase in corporate profits and tax cuts are pushing up wages. As such, consumer confidence is getting a boost, fueled by job growth and rising wages. And along with low gas prices, disposable income of consumers has increased as well which is likely to spur demand for retail goods. This is anticipated to have sent across 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. In the quarter under review, healthy property acquisition volume at decent investment spreads will likely aid the company’s performance.

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

These are anticipated to have helped the company enjoy higher revenues in the Oct-Dec quarter. In fact, the Zacks Consensus Estimate for fourth-quarter revenues is pegged at $343.2 million, indicating a year-over-year rise of 10.5%. The Zacks Consensus Estimate for rental revenues of $328 million also denotes a projected increase of 9.7%, year over year.

Nonetheless, despite all these efforts, the choppy retail real estate environment might limit its growth momentum to some extent. In fact, the recent data from Reis shows that the neighborhood and community shopping center vacancy rate remained flat in the fourth quarter at 10.2%. However, it inched up from 10% at year-end 2017. Mall vacancy rate edged down to 9% in the quarter from 9.1% in the third quarter. At year-end 2017, the mall vacancy was 8.3%. In addition, the company has substantial exposure to single-tenant assets which raises its risks associated with tenant default.

Further, prior to the fourth-quarter earnings release, there is lack of any solid catalyst. As such, the Zacks Consensus Estimate of FFO per share for the fourth quarter remained unchanged at 75 cents, over the past month. The figure also indicates a 1.3% decline from the comparable period last year.

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:

Hersha Hospitality Trust HT, scheduled to release earnings on Feb 25, has an Earnings ESP of +3.81% and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Americold Realty Trust COLD, slated to release fourth-quarter results on Feb 21, has an Earnings ESP of +12.94% and holds a Zacks Rank of 3.

American Tower Corporation AMT, set to release earnings on Feb 27, has an Earnings ESP of +0.29% and carries a Zacks Rank of 3.

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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