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It has been about a month since the last earnings report for Realty Income Corp. (O). Shares have added about 1.9% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Realty Income Corp. due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Realty Income Q3 FFO Lags Estimates, Acquisition View Up
Realty Income’s third-quarter 2020 adjusted FFO per share of 81 cents missed the Zacks Consensus Estimate of 84 cents. The reported figure is also down 2.4% from the prior-year quarter’s 83 cents.
Notably, the theater industry, which represented 5.7% of annualized contractual rental revenues for Realty Income as of Sep 30, 2020, has been subject to disruption due to the coronavirus pandemic, raising concerns about collectability of rent.
As such, the company reserved for 100% of the outstanding receivables for 37 out of 78 theater properties and will account prospectively for these leases on a cash-accounting basis. The aggregate reserves totaled $17.2 million and the establishments of reserves led to 4 cents per share dilution to the company’s adjusted FFO per share.
Total revenues for the reported quarter came in at $404.6 million, up 8.1% year over year. The revenue figure, however, missed the Zacks Consensus Estimate of $408.3 million.
Realty Income also apprised of its rental receipts through Oct 31, and noted that it has collected 93.1% of contractual rent due for the third quarter and 92.9% of contractual rent due for October. Further, the company has collected 89.9% of contractual rent due for October from the top 20 tenants and 100% of contractual rent for the month from its investment-grade tenants.
Quarter in Detail
During third-quarter 2020, same-store rental revenues on 5,511 properties under lease slipped 4.4% to $303 million from the prior-year quarter. Same-store rental income was affected by reserves recorded in the reported quarter. Portfolio occupancy of 98.6 % as of Sep 30, 2020, expanded 10 basis points (bps) sequentially and 30 bps year over year. The company generated a rent recapture rate of 99.2% on re-leasing activity.
During the reported quarter, Realty Income invested $658.6 million in 89 properties and properties under development or expansion. This also includes $230 million in seven properties in the U.K. According to management, the investments involved high-quality real estate leased to leading operators in essential and resilient industries, such as grocery, home improvement and convenience store industries.
Around 73% of the rental revenues reaped from acquisitions during the September-end quarter came in from investment grade-rated tenants, their subsidiaries or affiliated companies.
The company sold 37 properties, generating net proceeds of $51.3 million, with a gain on sales of $13.7 million, during the July-September period.
Realty Income exited the third quarter with cash and cash equivalents of $724.8 million, up from the $54 million witnessed at the end of 2019. Moreover, as of Sep 30, total liquidity amounted to $3.2 billion, including $724.8 million of cash in hand and $2.4 billion remaining borrowing capacity available on its $3-billion revolving credit facility, thereby enjoying healthy financial flexibility.
As of Sep 30, 2020, the balance of its commercial paper program was $300 million. The company ended the third quarter with a net debt to adjusted EBITDAre ratio of 5.3x and a fixed charge coverage ratio of 5.2x.
During the third quarter, the company raised $348.6 million from the sale of common stock, at a weighted average price of $62.57 per share, primarily through its At-The-Market-Program. In addition, it issued $350 million of 3.250% senior unsecured notes due 2031.
Realty Income raised the 2020 acquisition guidance to $2 billion on the company’s robust financial position and continued performance of its business.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
Currently, Realty Income Corp. has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Realty Income Corp. has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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