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Realty Income's (O) Q3 FFO & Revenues Surpass Estimates

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Realty Income Corporation’s (O - Free Report) third-quarter 2018 adjusted funds from operations (FFO) per share of 81 cents surpassed the Zacks Consensus Estimate of 79 cents. The reported figure also increased 5.2% from the prior-year tally of 77 cents.

The company benefited from year-over-year growth in revenues and also enjoyed high occupancy levels. Further, it revised its guidance for 2018 adjusted FFO per share, increasing the lower end of the previous projection.

Total revenues for the reported quarter came in at $338.1 million, up 10.2% year over year. The revenue figure also exceeded the Zacks Consensus Estimate of $334.2 million.

Quarter in Detail

During third-quarter 2018, same-store rents on 4,707 properties under lease advanced 1.0% to $272.9 million from the prior-year quarter. Portfolio occupancy of 98.8% as of Sep 30, 2018, expanded 10 basis points (bps) sequentially and 50 bps year over year.

Further, the company had 71 properties available for lease, out of a total of 5,694 properties in the portfolio as of Sep 30, 2018, compared with 69 properties as of Jun 30, 2018. Moreover, during the quarter, the company re-leased 64 properties to existing and new tenants, at a rent recapture rate of 107.9%.

Portfolio Activity

During the quarter under review, Realty Income invested $608.5 million in 238 new properties and properties under development or expansion, situated in 25 states. The assets are fully leased, with a weighted average lease term of around 15.3 years, and an initial average cash lease yield of 6.3%. Around 62% of the rental revenues from acquisitions reported during the quarter came in from investment grade-rated tenants.

On the other hand, the company sold 20 properties for $35.5 million, with a gain on sales of $7.8 million, during the Jul-Sep period.

Liquidity

Finally, Realty Income exited third-quarter 2018 with cash and cash equivalents of $6.7 million, slightly down from $6.9 million at the end of 2017. Furthermore, Realty Income raised $293.0 million from the sale of common stock, at a weighted average price of $57.53 per share, during the Sep-end quarter.

As of Sep 30, 2018, Realty Income had a balance of $774 million on its previous revolving credit facility. In addition, in Oct 2018, the company entered in a new $3.25 billion unsecured credit facility to amend and restate its earlier $2.25 billion unsecured credit facility, of which $2.0 billion was scheduled for expiry in Jun 2019. The new credit facility comprises a $3.0 billion unsecured revolving credit facility and a new $250 million unsecured term loan due March 2024.

Outlook

For full-year 2018, Realty Income revised its adjusted FFO per share guidance to $3.18-$3.21 from the prior range of $3.16-$3.21. This denotes annual growth of 4-5%. The Zacks Consensus Estimate for the same is currently pegged at $3.18.

Our Take

Realty Income’s better-than-expected third-quarter performance in terms of FFO per share is 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 #3 (Hold). 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 Omega Healthcare Investors, Inc. (OHI - 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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