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What's in Store for Realty Income (O) This Earnings Season?

EPR O HCP PDM

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Realty Income Corp. (O - Free Report) is slated to report first-quarter 2017 results after the market closes on Apr 25.

Last quarter, this monthly dividend paying real estate investment trust (“REIT”) delivered a positive earnings surprise of 2.67%. Results reflect better-than-expected growth in revenues.

The company has a mixed surprise history. In fact, the company exceeded estimates in one occasion, met in another and missed in the other two, over the trailing four quarters, resulting in an average negative surprise of 0.03%. This is depicted in the graph below.

The Zacks Consensus Estimate for first-quarter funds from operations (“FFO”) per share is currently pegged at 75 cents.

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

Factors to Consider

Realty Income derives cash flows from more than 4,900 real estate properties owned under long-term lease agreements with regional and national commercial tenants. This company targets well located, freestanding, single-tenant, net-lease, commercial properties, and derives more than 90% of its annualized retail rental revenue from tenants with a service, non-discretionary, and/or low price point component to their business. This helps the company navigate different economic cycles and compete with growing competition arising from the e-commerce boom.

In the first quarter, Realty Income is expected to have experienced growth in same-store rent, though at a modest pace. Also, occupancy levels are anticipated to have remained high. In fact, since 1996, the company’s occupancy level has never been below 96%. Balance sheet is also likely to remain solid, with adequate liquidity and financial flexibility, allowing the company to target opportunistic acquisitions. However, competition remained solid in the quarter and retail sales also remained choppy in February and March.
 
Realty Income’s activities during the quarter could not gain adequate analysts’ confidence. Consequently, the Zacks Consensus Estimate remained unchanged at 75 cents over the last seven days.

Nevertheless, shares of Realty Income outperformed the Zacks categorized REIT and Equity Trust – Retail industry over the past three months. In fact, the company’s shares logged in a return of 3.0% over this time frame compared with the industry’s decline of 2.9%.



Earnings Whispers

Our proven model does not conclusively show that Realty Income will beat on earnings 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. However, that is not the case here as you will see below.

Zacks ESP: The Earnings ESP for Realty Income is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 75 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Realty Income’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

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

Piedmont Office Realty Trust, Inc. (PDM - Free Report) , slated to release first-quarter results on May 2, has an Earnings ESP of +2.33% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

HCP Inc. (HCP - Free Report) , scheduled to release earnings on May 2, has an Earnings ESP of +2.08% and a Zacks Rank #3.

EPR Properties (EPR - Free Report) , slated to release earnings on May 2, has an Earnings ESP of +0.84% and a Zacks Rank #3.

Note: All EPS numbers presented in this write up represent funds from operations (FFO) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

 
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