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

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Realty Income Corp. (O - Free Report) is slated to report second-quarter 2017 results after the market closes on Jul 26.

Last quarter, this monthly dividend paying real estate investment trust (“REIT”) delivered a positive surprise of 1.33%, in terms of funds from operations (“FFO”) per share. Results indicated higher-than-expected growth in revenue.

However, Realty Income has a mixed surprise history. The company surpassed estimates in two occasions, met in another and missed in the other, over the trailing four quarters, resulting in an average positive surprise of 0.65%. This is depicted in the graph below:

Realty Income Corporation Price and EPS Surprise
 

The Zacks Consensus Estimate for second-quarter FFO per share is currently pegged at 76 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. The company’s portfolio is well diversified with respect to tenant, industry, geography and property type. It targets well located, free-standing, single-tenant, net-lease commercial properties. The company generates majority of its annualized retail rental revenue from tenants with a service, non-discretionary, and/or low-price point component to their business.

However, competition remained solid in the quarter and the retail real estate market remained choppy amid retailer bankruptcies and store closures. In addition, the company has substantial exposure to single tenant assets that raises its risks associated with tenant default. Amid these, growth in same-store rent is like to be modest.

Earnings Whispers

Our proven model does not conclusively show that Realty Income will beat estimates 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.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP, which represents the percentage difference between the Most Accurate estimate of 77 cents and the Zacks Consensus Estimate of 76 cents, is +1.32%.

Zacks Rank: Realty Income has a Zacks Rank #4 (Sell).

Although a positive ESP is a meaningful and leading indicator of a likely positive surprise, we also need to have a favorable rank 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:

Liberty Property Trust , slated to release second-quarter results on Jul 25, has an Earnings ESP of +1.61% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

CyrusOne Inc. , scheduled to release earnings on Aug 2, has a Zacks Rank #2 and an Earnings ESP of +2.70%.

Piedmont Office Realty Trust, Inc. (PDM - Free Report) , slated to release earnings on Aug 2, has an Earnings ESP of +2.27% 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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