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Realty Income (O) Q3 FFO Beats Estimates, Revenues Up Y/Y

Realty Income Corporation’s O third-quarter 2017 adjusted funds from operations (FFO) per share of 77 cents outpaced the Zacks Consensus Estimate by a penny.

The figure also came in 6.9% higher than the prior-year quarter tally of 72 cents. Results reflect better-than-expected growth in revenues.

Total revenues for the quarter came in at $306.9 million, surpassing the Zacks Consensus Estimate of $299.0 million. Revenues were also up 10.7% year over year.

Realty Income Corporation Price, Consensus and EPS Surprise

Realty Income Corporation Price, Consensus and EPS Surprise | Realty Income Corporation Quote

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share.

Quarter in Detail

During third-quarter 2017, same-store rents on 4,272 properties under lease expanded 1.0% to $244.9 million from the prior-year quarter. Portfolio occupancy of 98.3% as of Sep 30, 2017, remained unchanged year over year.

Further, the company had 86 properties available for lease, out of a total of 5,062 properties in the portfolio as of Sep 30, 2017, compared with 76 properties as of Jun 30, 2017. Moreover, during the reported quarter, it re-leased 79 properties to existing and new tenants, at a rent recapture rate of 103.7%, representing the fifth consecutive quarter in excess of 100%.

Portfolio Activity

During the reported quarter, Realty Income invested $264.9 million in 56 new properties and properties under development or expansion, situated in 16 states. The assets are fully leased, with a weighted average lease term of around 15.2 years, and an initial average cash lease yield of 7.0%. Around 10% of the rental revenues from acquisitions during the third quarter are from investment grade-rated tenants.

On the other hand, during the quarter, the company sold 17 properties for $25.5 million, with a gain on sales of $4.3 million.


Finally, Realty Income exited the third quarter with cash and cash equivalents of $3.2 million, down from $9.4 million at the end of the prior year.

However, 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 Sep 30, 2017, Realty Income had borrowing capacity of $1.34 billion available on its revolving credit facility.


For 2017, Realty Income reiterated its adjusted FFO per share guidance in the range of $3.03-$3.07, marking annual increase of 5.2-6.6%.

Our Take

Realty Income’s focus on leasing to service, non-discretionary, and low price-based retailers, accretive acquisitions and conservative capital structure augur well. Rising monthly dividend payouts enhance shareholders’ confidence. Nevertheless, substantial exposure to single-tenant assets raises its risks associated with tenant default. Further, generation of notable rental revenues from assets leased to drug stores and rate hikes add to its woes.

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.

The stock has lost 5.2% of its value year to date, versus the 6.2% loss incurred by the industry it belongs to.

We look forward to the earnings releases of retail REITs Simon Property Group, Inc. SPG, The Macerich Company MAC and GGP Inc. GGP. Simon Property is scheduled to report on Oct 27, while Macerich and GGP are slated to release their quarterly numbers on Oct 30 and Oct 31, respectively.

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.

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