What's In The Cards For Realty Income (O) In Q2 Earnings?

Realty Income Corp.'s (NYSE:O) second-quarter 2022 results are slated for an Aug 3 release after the bell. The company's quarterly results are likely to display increases in revenues and funds from operations (FFO) per share.

In the last reported quarter, this monthly dividend-paying real estate investment trust ("REIT") delivered a surprise of 1.03% in terms of adjusted FFO per share. Results reflected a better-than-expected improvement in revenues. The company benefited from expansionary effects.

Over the trailing four quarters, the company surpassed estimates on two occasions, met on one and missed the same on the other, the average surprise being 0.26%. This is depicted in the graph below:

Realty Income Corporation Price and EPS Surprise

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

Let's see how things have shaped up before this announcement.

Factors to Consider

Per a report from CBRE Group CBRE, retail real estate metrics remained strong in the second quarter, even amid weak retail sales growth. Total retail sales increased 3.8% year over year in the second quarter, lower than the five-year quarterly average of 7.0%. The average retail asking rent improved 2.4% year over year to $22.39 per square foot in the second quarter. It marked the highest annual growth rate since the first quarter of 2017. The retail availability rate in the second quarter hit a 10-year low of 5.1%.

Retail space absorption decreased 40% quarter over quarter and 20% year over year to 19.9 million square feet in the second quarter. Second-quarter absorptions were mainly driven by an expansion by existing retailers as new developments remained muted, per the CBRE Group report.

Realty Income's essential retail tenants in its roster have been the saving grace amid this long-standing health crisis. The company's top industries (representing more than 33% of rental revenues as of Mar 31, 2022) — grocery stores (10.4%), convenience stores (9.1%), dollar stores (7.4%) and drug stores (6.5%) — sold essential goods and continued to thrive, even during the pandemic. As such, O is expected to have enjoyed steady rental revenues in the quarter.

Realty Income focuses on external growth through the exploration of accretive acquisition opportunities. Such trends are anticipated to have continued in the to-be-reported quarter. The company's solid underlying real estate quality and prudent underwriting at acquisitions helped the company maintain its high occupancy levels consistently. In the second quarter too, the occupancy level is likely to have been healthy. Also, with the company's high-quality real estate portfolio leased to large, well-capitalized tenants, its cash flows are expected to have been decent.

Also, the acquisitions of well-located commercial properties add to the company's scale, offering a competitive edge to its industry. Hence, solid property acquisition volumes at decent investment spreads are likely to have aided the company's performance.

The Zacks Consensus Estimate for quarterly revenues is pegged at $808.5 million, suggesting a 74.1% increase from the year-ago quarter. The consensus mark for rental revenues (excluding reimbursable) is $757.93 million, up from the prior quarter's $755.56 million and the year-ago period's $436.74 million.

Realty Income also emerged as a company with decent financial health through its efforts to boost its balance sheet strength. This trend is likely to have continued through the April-June period as well. In April 2022, Realty Income expanded its unsecured revolving credit facility to $4.25 billion, replacing the existing $3.0-billion facility.

However, Realty Income's activities during the soon-to-be-reported quarter were not adequate to gain analysts' confidence. The Zacks Consensus Estimate for the second-quarter FFO per share has been revised 3 cents south to 95 cents. However, it suggests 7.95% growth year over year.

Here Is What Our Quantitative Model Predicts:

Our proven model does not conclusively predict a surprise in terms of FFO per share for O this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an FFO beat. However, that's not the case here.

Realty Income currently carries a Zacks Rank #4 (Sell) and has an Earnings ESP of -1.84%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter.

Stocks to Consider

Here are two stocks from the broader REIT sector — Public Storage (NYSE:PSA) and Host Hotels & Resorts, Inc. (NASDAQ:HST) — that you may want to consider as our model shows that these have the right combination of elements to report a surprise this quarter.

Public Storage, slated to release quarterly numbers on Aug 4, has an Earnings ESP of +0.31% and carries a Zacks Rank of 3 at present. 
Host Hotels & Resorts, scheduled to report quarterly numbers on Aug 3, currently has an Earnings ESP of +9.18% and carries a Zacks Rank of 2.
 
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