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What's in the Cards for Realty Income (O) in Q1 Earnings?

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Realty Income Corp. (O - Free Report) is scheduled to report first-quarter 2018 results after the market closes on May 8. The company’s funds from operations (FFO) per share and revenues are estimated to have witnessed a rise year over year.

In the last reported quarter, this monthly-dividend-paying real estate investment trust (REIT) posted a negative surprise of 1.3%, in terms of FFO per share. It witnessed modest year-over-year growth in same-store rents and had exited the quarter with lower liquidity.

Notably, Realty Income has a mixed surprise history. The company surpassed estimates in two occasions, missed in one and met in the other, over the trailing four quarters, resulting in an average positive surprise of 0.34%. This is depicted in the graph below:

Realty Income Corporation Price and EPS Surprise

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

Factors to Consider

Realty Income’s portfolio is well diversified with respect to tenant, industry, geography and property type. Besides retail properties, the company’s portfolio comprises industrial, office as well as agricultural properties. Further, it derives more than 90% of its annualized retail rental revenues from tenants with a service, non-discretionary, and/or low price point component to their business. Such businesses are less susceptible to economic recessions, as well as competition from Internet retail. This is expected to have helped the company enjoy higher retail revenues in the Jan-Mar quarter. In fact, the Zacks Consensus Estimate for revenues from the company’s retail segment for first quarter is pegged at $303 million. This reflects a robust 6% increase from the prior-year quarter.

Also, the company targets industrial properties leased to Fortune 1000, mainly investment grade-rated companies, which ensures stable revenues from these properties.

Encouragingly, Realty Income’s FFO per share estimates witnessed positive revision. The Zacks Consensus Estimate for first-quarter FFO per share has been revised upward by a cent to 79 cents, over the last 30 days, reflecting bullish analyst sentiment. This also reflects 3.9% year-over-year increase from the prior-year quarter.

Additionally, the Zacks Consensus Estimate for first-quarter revenues is pegged at $321.6 million, indicating a year-over-year rise of 7.9%.

However, the retail real estate market remained turbulent amid retailer bankruptcies and store closures. Particularly, mall traffic has been affected, and retail landlords, including GGP Inc. , Regency Centers Corporation (REG - Free Report) and Kimco Realty Corporation (KIM - Free Report) , have felt the heat due to consumers’ preferences increasingly shifting toward e-retail. In addition, the company has substantial exposure to single-tenant assets which raises its risks associated with tenant default.

Amid these, growth in revenues from tenant reimbursements is expected to have been modest. In fact, the Zacks Consensus Estimate for tenant reimbursements of $11.31 million reflects around 1.2% increase from the prior quarter.

Earnings Whispers

Our proven model shows that Realty Income has the right combination of the two key ingredients — positive Earnings ESP and a Zacks Rank #3 (Hold) or better — which increases the odds of an earnings beat in the first quarter.

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

Zacks ESP: The Earnings ESP for Realty Income is +1.91%

Zacks Rank: Realty Income has a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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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