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

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Realty Income Corp.’s (O - Free Report) second-quarter 2021 results are slated for an Aug 2 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) posted a surprise of 1.18% in terms of FFO per share. The healthy performance reflected improved revenues in the quarter.

Over the trailing four quarters, the company surpassed estimates on three occasions and missed in the other, the average beat being 2.99%. 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

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

Factors to Consider

The retail real estate market had already been battling dwindling traffic issues, store closures and retailer bankruptcies, and then the pandemic had added to its woes. However, per a report from CBRE Group (CBRE - Free Report) , amid an improving economy and solid consumer demand, total retail sales climbed 31%, year over year, in the second quarter.

The total retail availability rate contracted 30 basis points (bps) quarter over quarter to 6.2%. There have been wide variations in availability rates by markets, with suburban and secondary markets outperforming urban cores. The second-quarter net absorption remained positive for the third straight quarter, highlighting continued demand recovery from the pandemic-induced lows. Moreover, average retail asking rent advanced 20 bps, sequentially, and 10 bps, year over year, to $20.86 per square feet.

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 Mar 31, 2021) — convenience stores, grocery stores, drug stores, and dollar stores — sell essential goods and continued to thrive even amid 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 second quarter 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 the second 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 clients, 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 April-June 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-quarter 2021, Realty Income invested $1.03 billion in 110 properties and properties under development or expansion. Such trends are anticipated to have continued in the to-be-reported quarter. In fact, in April, Realty Income announced entering into a definitive merger agreement with VEREIT, Inc. for the acquisition of the latter in an all-stock transaction. The acquisitions of well-located commercial properties add to the company’s scale, offering a competitive edge to its net lease industry.

The Zacks Consensus Estimate for quarterly revenues is pegged at $447.7 million, suggesting an 8% increase from the year-ago quarter. The consensus mark for rental revenues (including reimbursable) is $442 million, up from the prior quarter’s $439 million and the year-ago period’s $410 million.

Realty Income’s activities during the soon-to-be-reported quarter were adequate to gain analysts’ confidence. The Zacks Consensus Estimate for the second-quarter FFO per share has been revised 2 cents upward to 88 cents in a month’s time. It also suggests 2.3% growth, year on year.

Here is what our quantitative model predicts:

Our proven model predicts 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 chances of a FFO beat. 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 of 3 and has an Earnings ESP of +1.14%.

Other 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 too have the right combination of elements to report positive surprises this quarter:

The Macerich Company (MAC - Free Report) , scheduled to announce quarterly numbers on Aug 4, currently has an Earnings ESP of +1.62% 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 - Free Report) , set to report quarterly results on Aug 4, has an Earnings ESP of +1.83% 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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