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What's in the Cards for Realty Income's (O) Q2 Earnings?

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Realty Income Corp. (O - Free Report) is scheduled to report second-quarter 2020 numbers on Aug 3, after market close. While the company’s results are anticipated to reflect year-over-year increases in revenues, funds from operations (FFO) per share might display a decline.

In the last reported quarter, this monthly dividend-paying real estate investment trust (REIT) reported a positive surprise of 3.53% in terms of FFO per share. Results were aided by improvement in same-store rent and healthy occupancy level, which drove 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 beat being 2.09%. This is depicted in the graph below:

Realty Income Corporation Price, Consensus and EPS Surprise

Realty Income Corporation Price, Consensus and EPS Surprise

Realty Income Corporation price-consensus-eps-surprise-chart | Realty Income Corporation Quote

Let’s see how things have shaped up for this announcement.

Factors to Consider

The retail real estate market had already been bearing the brunt of declining traffic, store closures and retailer bankruptcies, and now the pandemic has only added to its woes. Per a report from CBRE Group (CBRE - Free Report) , the overall retail availability rate in second-quarter 2020 expanded 3 basis points to 6.4%, while retail properties witnessed their first quarterly decline in net absorption since early 2011. Neighborhood, community & strip centers resulted in majority of the decrease in net absorption.

Nevertheless, having essential retail tenants in its roster have been saving the day during this crisis. Realty Income’s top four industries (around 37% of annualized rent) — which are convenience stores (accounting 11.9% of rental revenues for first-quarter 2020), drug stores (9%), dollar stores (8%) and grocery stores (7.7%) — sell essential goods and have continued to thrive even during the pandemic. These tenants have paid 99.7% of rent due through Jul 1, according to the company’s business update.

Across Realty Income’s total portfolio, contractual rent collection was 85.4% for the second quarter. Rent collections were the lowest in May, with 83.5% of rents collected in the total portfolio. Nonetheless, its investment-grade rated tenants, who account for 48% of rents, have paid 99.1% of rents due. The company collected all rents from such tenants for April, while receipts for May and June were 98.4% and 98.9%, respectively.

Further, the company’s top 20 tenants, who represent 53.1% of annualized rental revenues, paid 82.5% of second-quarter rents due. This consisted of 83%, 82.1% and 82.5% of rents collected by the company for April, May and June, respectively.

The Zacks Consensus Estimate for quarterly revenues is pegged at $393.7 million, suggesting a rise of 7.7% from the year-ago reported figure.

However, retail businesses depend on customer traffic and consumers are avoiding gathering in large public spaces due to the pandemic. This has taken a toll on tenants’ liquidity, who are unable to meet rental obligations. This is expected to have affected the company’s second-quarter performance as it generates 84% of rents from retail properties.

In addition, its tenants from the theater, health and fitness, restaurant, and automotive service industries have been hit hard due to the government-mandated closures and social-distancing requirements. These tenants represent 21.3% of rent due but 81% of unpaid June rent.

Realty Income’s activities during the quarter were inadequate to gain analysts’ confidence. The Zacks Consensus Estimate for the second-quarter FFO per share has been revised 5% downward to 76 cents in a month’s time. It also calls for a 7.3% year-over-year decline.

Nevertheless, amid such a crisis, Realty Income has been making efforts to boost liquidity and strengthen the balance sheet. As of Jul 1, the company had $628.6 million of outstanding borrowings under its revolving credit facility that had a weighted average interest rate of 0.92%. As of the same date, liquidity stood at $2.7 billion, consisting of $2.4 billion of available borrowing capacity on the revolving credit facility, cash on hand of $74 million and a $300-million term deposit.

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 -4.19%.

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:

Healthcare Trust of America, Inc. (HTA - Free Report) , set to report quarterly numbers on Aug 6, currently has an Earnings ESP of +0.96% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

SBA Communications Corporation (SBAC - Free Report) , slated to release results on Aug 3, has an Earnings ESP of +4.48% and carries a Zacks Rank of 3, 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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