What's in the Cards for Realty Income's (O) Q1 Earnings?

Realty Income Corp. O is scheduled to report first-quarter 2020 numbers on May 4, after market close. The company’s results are anticipated to reflect year-over-year 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) reported a positive surprise of 3.61% in terms of FFO per share. Results were driven by improvement in same-store rent and healthy occupancy level, which aided top-line expansion.

Realty Income has a decent surprise history. Over the trailing four quarters, the company surpassed estimates on three occasions and met in the other, the average positive beat being 1.84%. 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-eps-surprise | Realty Income Corporation Quote

This 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. This is expected to have been conducive to its cash flow in the first quarter.

The company focuses on external growth through exploring accretive acquisition opportunities. Healthy property-acquisition volume at decent investment spreads is likely to have aided the company’s quarterly performance.

In 2019, the company invested $3.7 billion in 789 properties and properties under development or in expansion, including $797.8 million in 18 properties across the U.K. Such trends are likely to have continued in the quarter under review as well.

Realty Income’s solid underlying real estate quality and prudent underwriting at acquisition has helped the company maintain high occupancy levels consistently. In fact, its occupancy level has never been below 96% since 1996. This trend is likely to have continued in the period in discussion as well. Additionally, its same-store rent growth is likely to have registered limited operational volatility.

Amid these, the Zacks Consensus Estimate for first-quarter revenues is pegged at $410.9 million, suggesting a rise of roughly 16% from the year-ago reported figure. Further, the Zacks Consensus Estimate for the first-quarter FFO per share is currently pinned at 86 cents, calling for a 4.9% year-over-year increase.

However, despite all these efforts, the choppy retail real estate environment might have limited its growth momentum to some extent, as secular industry headwinds, including retailer downsizing and tenant bankruptcies have been dampening the industry fundamentals and affecting retail REITs.

Moreover, the escalating number of coronavirus cases has forced several retailers to close their stores, in order to contain the spread of the virus. Some retailers have also reduced store hours, while many others are keeping e-retail operations running as consumers are now increasingly opting for online purchases to avoid gathering in public spaces. Realty Income too has withdrawn its full-year guidance. However, the impact of such shutdowns and store closures are likely to be more pronounced on retail real estate fundamentals in the second quarter than in the first.

As such, prior to the quarterly earnings release, there is lack of any solid catalyst. The Zacks Consensus Estimate for the first-quarter FFO per share remained unchanged at 86 cents over the past month.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a positive 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 #3 and has an Earnings ESP of -0.07%.

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 too have the right combination of elements to report a positive surprise this quarter:

SBA Communications Corporation SBAC, set to report quarterly numbers on May 5, has an Earnings ESP of +0.67% and carries a Zacks Rank of 3 currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

CoreSite Realty Corporation COR, slated to release first-quarter earnings on Apr 30, has an Earnings ESP of +3.19% and carries a Zacks Rank of 3 at present.

Americold Realty Trust COLD, expected to release earnings results around May 7, has an Earnings ESP of +9.74% and currently holds 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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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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