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Realty Income's (O) Q2 FFO Surpasses Estimates, View Up

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Realty Income Corporation’s (O - Free Report) second-quarter 2018 adjusted funds from operations (FFO) per share of 80 cents surpassed the Zacks Consensus Estimate of 79 cents. The reported figure also increased 5.3% from the prior-year tally of 76 cents.

The company benefited from year-over-year growth in revenues and also enjoyed high occupancy levels. Further, the company raised its guidance for 2018 adjusted FFO per share. It also increased its 2018 acquisitions guidance to around $1.75 billion from the previous projection of $1.0-$1.5 billion.

Total revenues for the reported quarter came in at $328.9 million, up 9.6% year over year. However, the revenue figure marginally missed the Zacks Consensus Estimate of $329.4 million.

Quarter in Detail

During second-quarter 2018, same-store rents on 4,731 properties under lease expanded 1.0% to $272.6 million from the prior-year quarter. Portfolio occupancy of 98.7% as of Jun 30, 2018, expanded 10 basis points (bps) sequentially and 20 bps year over year.

Further, the company had 69 properties available for lease, out of a total of 5,483 properties in the portfolio as of Jun 30, 2018, compared with 75 properties as of Mar 31, 2018. Moreover, during the quarter, the company re-leased 47 properties to existing and new tenants, at a rent recapture rate of 107.6%.

Portfolio Activity

During the quarter under review, Realty Income invested $347 million in 190 new properties and properties under development or expansion, situated in 24 states. The assets are fully leased, with a weighted average lease term of around 13.6 years, and an initial average cash lease yield of 6.5%. Around 52% of the rental revenues from acquisitions reported during the quarter came in from investment grade-rated tenants.

On the other hand, the company sold 26 properties for $33.7 million, with a gain on sales of $7.8 million, in Q2.

Liquidity

Finally, Realty Income exited second-quarter 2018 with cash and cash equivalents of $30.7 million, up from $6.9 million at the end of 2017.

The company has a $2.25-billion unsecured credit facility, comprising $2.0 billion revolving credit facility and a $250-million five-year unsecured term loan. The credit facility also bears a $1.0-billion expansion feature. As of Jun 30, 2018, Realty Income had borrowing capacity of $1.5 billion available on its revolving credit facility.

Furthermore, Realty Income raised $300.4 million from the sale of common stock, at a weighted average price of $53.44 per share, during the June-end quarter.

Outlook

For full-year 2018, Realty Income raised its adjusted FFO per share guidance to $3.16-$3.21 from the prior range of $3.14-$3.20. This denotes annual growth of 3-5%. The Zacks Consensus Estimate for the same is currently pegged at $3.17.

Our Take

Realty Income’s better-than-expected Q2 performance in terms of FFO per share and uptick in guidance are encouraging. Notably, this freestanding retail REIT derives more than 90% of its annualized retail rental revenues from tenants belonging to service, non-discretionary and low-price retail business. Such businesses are less susceptible to economic recessions, as well as competition from Internet retailing. In addition, the company’s solid underlying real estate quality and prudent underwriting at acquisitions have helped maintain its high occupancy levels consistently.

Nonetheless, despite all these efforts, the prevalent retail apocalypse is likely to limit its growth momentum to some extent. The company has substantial exposure to single-tenant assets which raises its risks associated with tenant default. Moreover, generation of considerable rental revenues from assets leased to drug stores and rate hike remain concerns.

Realty Income currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Realty Income Corporation Price, Consensus and EPS Surprise
 

We, now, look forward to the earnings releases of Lamar Advertising Company (LAMR - Free Report) , Host Hotels & Resorts, Inc. (HST - Free Report) and Outfront Media Inc. (OUT - Free Report) , all of which are scheduled to report their quarterly numbers next week.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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