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What's in the Cards for Realty Income's (O) Q3 Earnings?

Realty Income Corp.’s O third-quarter 2021 results are slated for a Nov 1 release, after the bell. The company’s quarterly results will likely display increases 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 an in-line performance in terms of FFO per share. Results reflected improved revenues in the quarter.

Over the trailing four quarters, the company surpassed estimates on two occasions, met in the other and missed in another, the average negative surprise being 0.30%. 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 prior to this announcement.

Factors to Consider

Per a report from CBRE Group CBRE, the total retail sales increased 15%, year over year, in the third quarter. The third quarter marked the fourth consecutive quarter of positive retail absorption (+36.7 million square feet) and each asset class marked quarter-over-quarter gains. Also, the average asking rent improved for the third consecutive quarter, up 2.9%, year over year, to $21.31 per square feet during the third quarter.

The overall retail availability rate shrunk to a 10-year low of 5.9% in the September-end quarter from the June-end quarter’s 6.2%. New construction deliveries were 6.4 million square feet in the third quarter, down 29% year on year on material cost increases and sourcing delays.

Realty Income’s essential retail tenants in its roster have been the saving grace amid this long-standing health crisis. The company’s top four industries (represent more than 37% of rental revenues as of Jun 30, 2021) — convenience stores (accounting for 11.6% of revenue), grocery stores (10.5%), drug stores (7.6%), and dollar stores (7.4%) — sell essential goods and continued to thrive even during the pandemic. As such, the company has received nearly all of the contractual rent due from tenants in these industries since the pandemic started and this trend is likely to have continued in the third quarter as well. Earlier, the company noted that for July, it has collected 99.4% of contractual rent across its total portfolio, inclusive of 98.9% collected from the theater clients.

Realty Income’s solid underlying real estate quality and prudent underwriting at acquisition has helped the company maintain its high occupancy levels consistently. In the third quarter too, occupancy level is likely to have been healthy. Also, with the company’s high-quality real estate portfolio leased to large, well-capitalized tenants, its cash flows are expected to have been decent.

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 through the July-September period as well. The company is focused on external growth through exploring accretive acquisition opportunities. In fact, solid property acquisitions volume at decent investment spreads are likely to have aided the company’s performance.

During first-half 2021, Realty Income invested $2.16 billion in 254 properties and properties under development or expansion. This included $994.8 million in the U.K. properties. Such trends are anticipated to have continued in the to-be-reported quarter.

In fact, in the third quarter, the company expanded into continental Europe with a €93-million strategic sale-leaseback transaction in Spain. The move, which marked the company’s “debut strategic expansion into Spain”, comprised seven properties under long-term net lease agreements with Carrefour and its real estate subsidiary Carrefour Property.

Also, in the third quarter, Realty Income inched closer to the VEREIT, Inc. merger with its shareholders and VEREIT stockholders approving all of the proposals necessary for the deal’s closure.

The acquisitions of well-located commercial properties add to the company’s scale, offering a competitive edge to its industry.

The Zacks Consensus Estimate for quarterly revenues is pegged at $479.1 million, suggesting an 18.4% increase from the year-ago quarter. The consensus mark for rental revenues (including reimbursable) is $474 million, up from the prior quarter’s $460 million and the year-ago period’s $402 million.

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 has been revised a cent upward to 91 cents in two months’ time. It also suggests 12.4% growth, year on year.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a 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 odds of a FFO beat. But that’s not the case here. 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 #2 and has an Earnings ESP of 0.00%.

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 surprises this quarter:

STORE Capital Corporation STOR, scheduled to announce quarterly numbers on Nov 4, currently has an Earnings ESP of +2.04% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Federal Realty Investment Trust FRT, set to report earnings results on Nov 4, has an Earnings ESP of +0.49% and carries a Zacks Rank of 2, 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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Federal Realty Investment Trust (FRT) : Free Stock Analysis Report

Realty Income Corporation (O) : Free Stock Analysis Report

STORE Capital Corporation (STOR) : Free Stock Analysis Report

CBRE Group, Inc. (CBRE) : Free Stock Analysis Report

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