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What's in the Offing for Realty Income (O) in Q3 Earnings?
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Realty Income Corp. (O - Free Report) is slated to report third-quarter 2023 results on Nov 6, after the opening bell. The company’s quarterly results are likely to display year-over-year growth in revenues and funds from operations (FFO) per share.
In the last reported quarter, this monthly dividend-paying real estate investment trust (REIT) pulled off a surprise of 1.01% in terms of adjusted FFO per share. The quarterly results benefited from better-than-expected revenues, expansionary effects and a healthy pipeline of opportunities globally.
Over the trailing four quarters, the company’s adjusted FFO per share surpassed the Zacks Consensus Estimate on three occasions and missed once, the average surprise being 0.30%. This is depicted in the graph below:
Per a report from CBRE Group (CBRE - Free Report) , retail space demand in the third quarter increased, with net absorption rising 34% quarter over quarter to 9.8 million square feet. Specifically, street retail, freestanding & other segment observed the most net absorption of 4.3 million square feet. While net absorption for neighborhood, community and strip centers fell 29% quarter over quarter, power center and lifestyle and mall segments turned positive after recording negative absorption in the second quarter.
In addition, owing to elevated construction costs and tight lending conditions, total new retail space delivered fell 28% sequentially to just under 5.6 million square feet. This represented the second-lowest total on record.
The overall availability rate in the third quarter fell 10 basis points (bps) to 4.8%, marking at least an 18-year low per the CBRE report. Neighborhood, community and strip centers witnessed the largest year-over-year decline of 50 bps and recorded availability of 6.6%.
However, the asking rent growth fell to just more than 2.1% on a year-over-year basis, with the overall average asking rent touching $23.42 per square foot in the quarter. This was mainly an indication that landlords are expecting demand to ease in the forthcoming quarters amid the likelihood of the U.S. economy slowing down.
O’s Portfolio & Q3 Projections
Realty Income owns a portfolio comprising major industries that sell essential goods and services in all the U.S. states, Puerto Rico, the U.K. and Spain. Given a robust retail real estate environment in the third quarter, we expect the company to have witnessed healthy demand for its properties, aiding leasing activity.
The company enjoys a diversified tenant base with respect to tenant, industry, geography and property type. It derives most of its annualized retail contractual rental revenues from tenants with a service, non-discretionary and/or low-price-point component to their business. This is likely to have supported stable rental revenue generation in the quarter, boosting the top line.
Further, given Realty Income’s solid underlying real estate quality and record of prudent underwriting at acquisitions, occupancy at the company’s properties is anticipated to have remained high. Notably, since 1998, O’s occupancy level has never been below 96%. Our estimate for third-quarter occupancy stands at 99.2%.
The Zacks Consensus Estimate for quarterly revenues is pegged at $1.04 billion, suggesting a 23.7% increase from the year-ago quarter’s reported figure. The consensus mark for rental revenues (excluding reimbursable) is $922.4 million, up from $907.6 million recorded in the prior quarter and $781.9 million in the year-ago quarter.
Realty Income is anticipated to have maintained a robust balance sheet position in the quarter, supporting its growth endeavors.
Nonetheless, higher e-commerce adoption and subdued consumer sentiments amid persistent macroeconomic uncertainty and a high interest rate environment are expected to have cast a pall on the company’s quarterly performance to some extent.
Also, higher interest expenses during the quarter are likely to have been a spoilsport. We estimate quarterly interest expenses to rise 30.7% year over year.
The company’s activities during the to-be-reported quarter were inadequate to garner analysts’ confidence. The Zacks Consensus Estimate for the quarterly FFO per share has been unchanged at $1.00 over the past month. The figure, however, implies 2.04% year-over-year growth.
Q3 Developments
In August 2023, Realty Income unveiled that it will invest around $950 million in The Bellagio, situated at the center of the Las Vegas Strip in Las Vegas, NV, at a valuation of $5.1 billion. It signed a definitive agreement to acquire common and preferred equity interests from Blackstone Real Estate Income Trust, Inc. (“BREIT”) in a new joint venture (JV) that owns a 95% interest in the real estate assets of the AAA Five Diamond Resort.
This marks the retail REIT’s second investment in the gaming industry and a first through its Credit Investments platform.
Upon completion of the deal, expected to close in the fourth quarter of 2023, The Monthly Dividend Company will invest roughly $300 million of common equity in the JV to purchase an indirect stake of 21.9% in the property. The remaining $650 million will be utilized to buy a yield-bearing preferred equity interest in the JV.
While BREIT will retain 73.1% of indirect interest in the Bellagio after the deal materializes, MGM Resorts International, which operates and maintains the property, will hold 5.0% of the stake.
Earning Whispers
Our proven model does not conclusively predict a surprise in terms of FFO per share for Realty Income this season. The combination of a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher increases the odds of a beat. However, that is not the case here.
Earnings ESP: O has an Earnings ESP of -0.43%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Simon Property Group, Inc. (SPG - Free Report) reported third-quarter 2023 FFO per share of $3.20, surpassing the Zacks Consensus Estimate of $2.98. Moreover, the figure increased 9.2% year over year.
Results reflected better-than-anticipated revenues on healthy leasing activity and a rise in the base rent per square foot and occupancy levels. However, higher property operating expenses and interest expenses partly offset the upsides. SPG also raised its 2023 FFO per share outlook.
The Macerich Company (MAC - Free Report) reported FFO per share, excluding financing expenses in relation to Chandler Freehold, of 44 cents, in line with the Zacks Consensus Estimate. However, the figure declined 4.3% from the year-ago quarter’s 46 cents.
The results reflected a year-over-year increase in quarterly revenues driven by a rise in occupancy. MAC also experienced an increase in same-center net operating income, including lease termination income, from the prior-year period.
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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What's in the Offing for Realty Income (O) in Q3 Earnings?
Realty Income Corp. (O - Free Report) is slated to report third-quarter 2023 results on Nov 6, after the opening bell. The company’s quarterly results are likely to display year-over-year growth in revenues and funds from operations (FFO) per share.
In the last reported quarter, this monthly dividend-paying real estate investment trust (REIT) pulled off a surprise of 1.01% in terms of adjusted FFO per share. The quarterly results benefited from better-than-expected revenues, expansionary effects and a healthy pipeline of opportunities globally.
Over the trailing four quarters, the company’s adjusted FFO per share surpassed the Zacks Consensus Estimate on three occasions and missed once, the average surprise being 0.30%. This is depicted in the graph below:
Realty Income Corporation Price and EPS Surprise
Realty Income Corporation price-eps-surprise | Realty Income Corporation Quote
Factors to Note
U.S. Retail Market in Q3
Per a report from CBRE Group (CBRE - Free Report) , retail space demand in the third quarter increased, with net absorption rising 34% quarter over quarter to 9.8 million square feet. Specifically, street retail, freestanding & other segment observed the most net absorption of 4.3 million square feet. While net absorption for neighborhood, community and strip centers fell 29% quarter over quarter, power center and lifestyle and mall segments turned positive after recording negative absorption in the second quarter.
In addition, owing to elevated construction costs and tight lending conditions, total new retail space delivered fell 28% sequentially to just under 5.6 million square feet. This represented the second-lowest total on record.
The overall availability rate in the third quarter fell 10 basis points (bps) to 4.8%, marking at least an 18-year low per the CBRE report. Neighborhood, community and strip centers witnessed the largest year-over-year decline of 50 bps and recorded availability of 6.6%.
However, the asking rent growth fell to just more than 2.1% on a year-over-year basis, with the overall average asking rent touching $23.42 per square foot in the quarter. This was mainly an indication that landlords are expecting demand to ease in the forthcoming quarters amid the likelihood of the U.S. economy slowing down.
O’s Portfolio & Q3 Projections
Realty Income owns a portfolio comprising major industries that sell essential goods and services in all the U.S. states, Puerto Rico, the U.K. and Spain. Given a robust retail real estate environment in the third quarter, we expect the company to have witnessed healthy demand for its properties, aiding leasing activity.
The company enjoys a diversified tenant base with respect to tenant, industry, geography and property type. It derives most of its annualized retail contractual rental revenues from tenants with a service, non-discretionary and/or low-price-point component to their business. This is likely to have supported stable rental revenue generation in the quarter, boosting the top line.
Further, given Realty Income’s solid underlying real estate quality and record of prudent underwriting at acquisitions, occupancy at the company’s properties is anticipated to have remained high. Notably, since 1998, O’s occupancy level has never been below 96%. Our estimate for third-quarter occupancy stands at 99.2%.
The Zacks Consensus Estimate for quarterly revenues is pegged at $1.04 billion, suggesting a 23.7% increase from the year-ago quarter’s reported figure. The consensus mark for rental revenues (excluding reimbursable) is $922.4 million, up from $907.6 million recorded in the prior quarter and $781.9 million in the year-ago quarter.
Realty Income is anticipated to have maintained a robust balance sheet position in the quarter, supporting its growth endeavors.
Nonetheless, higher e-commerce adoption and subdued consumer sentiments amid persistent macroeconomic uncertainty and a high interest rate environment are expected to have cast a pall on the company’s quarterly performance to some extent.
Also, higher interest expenses during the quarter are likely to have been a spoilsport. We estimate quarterly interest expenses to rise 30.7% year over year.
The company’s activities during the to-be-reported quarter were inadequate to garner analysts’ confidence. The Zacks Consensus Estimate for the quarterly FFO per share has been unchanged at $1.00 over the past month. The figure, however, implies 2.04% year-over-year growth.
Q3 Developments
In August 2023, Realty Income unveiled that it will invest around $950 million in The Bellagio, situated at the center of the Las Vegas Strip in Las Vegas, NV, at a valuation of $5.1 billion. It signed a definitive agreement to acquire common and preferred equity interests from Blackstone Real Estate Income Trust, Inc. (“BREIT”) in a new joint venture (JV) that owns a 95% interest in the real estate assets of the AAA Five Diamond Resort.
This marks the retail REIT’s second investment in the gaming industry and a first through its Credit Investments platform.
Upon completion of the deal, expected to close in the fourth quarter of 2023, The Monthly Dividend Company will invest roughly $300 million of common equity in the JV to purchase an indirect stake of 21.9% in the property. The remaining $650 million will be utilized to buy a yield-bearing preferred equity interest in the JV.
While BREIT will retain 73.1% of indirect interest in the Bellagio after the deal materializes, MGM Resorts International, which operates and maintains the property, will hold 5.0% of the stake.
Earning Whispers
Our proven model does not conclusively predict a surprise in terms of FFO per share for Realty Income this season. The combination of a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher increases the odds of a beat. However, that is not the case here.
Earnings ESP: O has an Earnings ESP of -0.43%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: O currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
Performance of Other Retail REITs
Simon Property Group, Inc. (SPG - Free Report) reported third-quarter 2023 FFO per share of $3.20, surpassing the Zacks Consensus Estimate of $2.98. Moreover, the figure increased 9.2% year over year.
Results reflected better-than-anticipated revenues on healthy leasing activity and a rise in the base rent per square foot and occupancy levels. However, higher property operating expenses and interest expenses partly offset the upsides. SPG also raised its 2023 FFO per share outlook.
The Macerich Company (MAC - Free Report) reported FFO per share, excluding financing expenses in relation to Chandler Freehold, of 44 cents, in line with the Zacks Consensus Estimate. However, the figure declined 4.3% from the year-ago quarter’s 46 cents.
The results reflected a year-over-year increase in quarterly revenues driven by a rise in occupancy. MAC also experienced an increase in same-center net operating income, including lease termination income, from the prior-year period.
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.