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

Realty Income Corp. O is slated to report first-quarter 2016 results after the market closes on Apr 26.

Last quarter, this monthly dividend real estate investment trust (“REIT”) delivered a positive earnings surprise of 2.90%. In the four trailing quarters, the company beat estimates in two with a positive average earnings surprise of 1.10%. The Zacks Consensus Estimate for first-quarter funds from operations (“FFO”) per share is currently 71 cents.

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

Factors to Consider

Realty Income derives cash flows from more than 4,500 real estate properties owned under long-term lease agreements with regional and national commercial tenants. This company targets well-located, freestanding, single-tenant, net-lease, commercial properties and more than 90% of its retail tenants offer a service, non-discretionary, and/or low price point businesses. This helps the company navigate different economic cycles and compete with growing competition arising from the e-commerce boom.

In the first quarter, Realty Income is expected to have experienced growth in same store rent, though at a modest pace. Store-level performance of its retail tenants is anticipated to have remained solid. Occupancy levels are expected to have remained high after the company successfully concluded re-leasing of its properties in 2015, the most active year in terms of lease expirations. Balance sheet is also expected to remain solid with adequate liquidity and financial flexibility allowing the company to target opportunistic acquisitions.

But competition remained solid in the quarter and lackluster retails sales in the first quarter are reasons to worry about. Consumers seem to be cautious and unwilling to spend much. Therefore any robust growth may have eluded the first quarter.
 
Realty Income’s activities during the quarter could not gain adequate analyst confidence. Consequently, the Zacks Consensus Estimate remained unchanged at 71 cents over the last seven days.

Earnings Whispers

Our proven model does not conclusively show that Realty Income will beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 71 cents. Hence, the Earnings ESP, which represents the percentage difference between them, is 0.00%.

Zacks Rank: Although the company’s Zacks Rank #2 increases the predictive power of ESP, its zero ESP makes a surprise prediction difficult.

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 to Consider

Here are a few stocks in the REIT sector you may want to consider, as our model shows that they have the right combination of elements to post a positive surprise this quarter:

Essex Property Trust Inc. ESS has an Earnings ESP of +1.14% and a Zacks Rank #2. The company will report results on Apr 28.

Taubman Centers, Inc. TCO has an Earnings ESP of +3.53% and a Zacks Rank #3. The company will release results on May 2.

Vornado Realty Trust VNO has an Earnings ESP of +2.44% and a Zacks Rank #3. The company will report first-quarter 2016 results on May 2.


Note: 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. All earnings per share numbers presented in this write up represent FFO per share.

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TAUBMAN CENTERS (TCO): Free Stock Analysis Report
 
REALTY INCOME (O): Free Stock Analysis Report
 
ESSEX PPTY TR (ESS): Free Stock Analysis Report
 
VORNADO RLTY TR (VNO): Free Stock Analysis Report
 
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