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Realty Income (O) Gears Up for Q4 Earnings: What to Expect?

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Realty Income Corp. (O - Free Report) is scheduled to report fourth-quarter and full-year 2019 results after market close on Feb 19. The company’s results are anticipated to reflect year-over-year increase in both revenues and funds from operations (FFO) per share.

In the last reported quarter, this monthly dividend-paying real estate investment trust (REIT) reported an in-line performance in terms of FFO per share. Results were driven by improvement in same-store rent and top-line expansion.

Realty Income has a decent surprise history. Over the trailing four quarters, the company surpassed estimates on three occasions and met in the other, the average positive beat being 2.27%. This is depicted in the graph below:

Realty Income Corporation Price and EPS Surprise

Realty Income Corporation Price and EPS Surprise

Realty Income Corporation price-eps-surprise | Realty Income Corporation Quote

Notably, this retail REIT derives more than 90% of its annualized retail rental revenues from tenants belonging to service, non-discretionary and low-price retail businesses. Such businesses are less susceptible to economic recessions, as well as competition from Internet retailing. This is expected to have been conducive to its cash flow in the fourth quarter.

Furthermore, the company focuses on external growth through exploring accretive acquisition opportunities. Healthy property-acquisition volume at decent investment spreads is likely to have aided the company’s quarterly performance.

Realty Income has invested approximately $2 billion in high-quality real estate during the first nine months of 2019, including concluding its first-ever international real estate investment in the U.K. Such trends are expected to have continued in the quarter under review as well.

Moreover, in September, Realty Income agreed to acquire 454 single-tenant retail properties from CIM Real Estate Finance Trust, Inc., in a deal valued at $1.25 billion. During the December-end quarter, the company closed the first tranche of this transaction with CIM Real Estate Finance Trust, Inc. by acquiring 411 properties for $1.035 billion. The transaction marks a major move for enhancing Realty Income’s portfolio.

Realty Income’s solid underlying real estate quality and prudent underwriting at acquisition has helped the company maintain high occupancy levels consistently. In fact, its occupancy level has never been below 96% since 1996. This trend is likely to have continued in the period in discussion as well. Additionally, its same-store rent growth is likely to have depicted limited operational volatility.

Amid these, the Zacks Consensus Estimate for fourth-quarter revenues is pegged at $387.3 million, indicating a rise of 13.05% from the year-ago reported figure. Further, the Zacks Consensus Estimate for the fourth-quarter FFO per share is currently pinned at 83 cents, calling for a 5.1% year-over-year increase.

Nonetheless, despite all these efforts, the choppy retail real estate environment might have limited its growth momentum to some extent, as secular industry headwinds, including retailer downsizing and tenant bankruptcies have been dampening the industry fundamentals and affecting retail REITs including Kimco Realty Corporation (KIM - Free Report) , The Macerich Company (MAC - Free Report) and other as well.

In fact, the recent data from Reis shows that the retail and the Mall vacancy rates both increased in the quarter. Particularly, the retail vacancy rate inched up 0.1% to 10.2% in the October-December period. Further, retail rent growth was just 0.1%, while mall rents remained flat.

Moreover, prior to the quarterly earnings release, there is lack of any solid catalyst. As such, the Zacks Consensus Estimate of FFO per share for the quarter remained unchanged at 83 cents over the past month.

Realty Income expects full-year 2019 adjusted FFO per share of $3.29-$3.34. The Zacks consensus Estimate for the same is currently pinned at $3.27, suggesting 2.5% year-over-year growth on revenues of $1.48 billion.

Here is what our quantitative model predicts:

Our proven model predicts a positive surprise in terms of FFO per share for Realty Income this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of a FFO beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Realty Income carries a Zacks Rank #3 and has an Earnings ESP of +1.25%.

Other Stock That Warrant a Look

Here is another stock in the REIT sector that you may want to consider, as our model shows that this has the right combination of elements to report a positive surprise this quarter:

Ventas, Inc. (VTR - Free Report) , slated to report fourth-quarter results on Feb 20, has an Earnings ESP of +0.81% and holds a Zacks Rank of 3, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

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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