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

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Realty Income Corp.O is scheduled to report third-quarter 2018 results after the market closes on Oct 31. The company's results are estimated to reflect year-over-year rise in funds from operations (FFO) per share and revenues.

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 an average positive surprise of 0.32%. 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

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

Factors to Consider

Realty Income makes concerted efforts to have a well-diversified portfolio with respect to tenant, industry, geography and property type. Apart from retail properties, the company's portfolio comprises industrial, office, as well as agricultural properties. This diversification helps it mitigate risks associated with a particular industry, geography or asset type.

Importantly, 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.

Realty Income is focused on external growth through exploring accretive acquisition opportunities. The company's solid underlying real estate quality and prudent underwriting at acquisition has helped the company maintain high occupancy levels consistently. Since 1996, the company's occupancy level has never been below 96%. The trend is expected to have continued in the to-be-reported quarter as well. Also, its same-store rent growth is likely to exhibit limited operational volatility.

In addition, recovering economy, low unemployment level and rising incomes from tax cuts are likely to spur demand for retail goods. Furthermore, high consumer sentiment, upbeat consumer sales and improving net absorption are likely to aid occupancy levels.

These are expected to have helped the company enjoy higher retail revenues in the Jul-Sep quarter. In fact, the Zacks Consensus Estimate for third-quarter revenues is pegged at $334.2 million, indicating a year-over-year rise of 8.9%. The Zacks Consensus Estimate for rental revenues of $318 million also denotes a projected increase of 8.5% year over year.

Amid these, the Zacks Consensus Estimate for third-quarter FFO per share is 79 cents, indicating 2.6% growth from the comparable period last year.

Nonetheless, despite all these efforts, the choppy retail real estate environment may limit growth momentum to some extent. In addition, the company has substantial exposure to single-tenant assets which raises its risks associated with tenant default. Further, prior to the third-quarter earnings release, there is lack of any solid catalyst. As such, the Zacks Consensus Estimate of FFO per share for Q3 remained unchanged at 79 cents, over the past two months.

Earnings Whispers

Our proven model does not conclusively show that Realty Income will likely beat estimates this season. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen.

You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Earnings ESP: The Earnings ESP is -1.61%.

Zacks Rank: Realty Income has a Zacks Rank of 3, 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 other 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:

Welltower Inc.WELL , scheduled to release earnings on Oct 30, has an Earnings ESP of +2.04% and a Zacks Rank #3. You can see the complete list of today's Zacks #1 Rank stocks here .

Extra Space Storage Inc.EXR , slated to release third-quarter results on Oct 30, has an Earnings ESP of +0.14% and a Zacks Rank of 3.

Public StoragePSA , set to report its quarterly numbers on Oct 30, has an Earnings ESP of +1.91% and a Zacks Rank #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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Realty Income Corporation (O): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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