Realty Income Corporation’s O first-quarter 2018 adjusted funds from operations (FFO) per share of 79 cents came in line with the Zacks Consensus Estimate and increased 3.9% from the prior-year quarter.

The company benefited from revenue growth in the quarter and also attained its highest quarter-end occupancy in more than 10 years. Further, the company reiterated its guidance for 2018 adjusted FFO per share.

Total revenues for the reported quarter came in at $318.3 million, up 6.8% year over year. However, the reported figure missed the Zacks Consensus Estimate of $321.6 million.

Quarter in Detail

During first-quarter 2018, same-store rents on 4,747 properties under lease expanded 1.0% to $276.7 million from the prior-year quarter. Portfolio occupancy of 98.6% as of Mar 31, 2018, expanded 20 basis points (bps) sequentially and 30 bps year over year.

Further, the company had 75 properties available for lease, out of a total of 5,326 properties in the portfolio as of Mar 31, 2018, compared with 83 properties as of Dec 31, 2017. Moreover, during the reported quarter, it re-leased 55 properties to existing and new tenants, at a rent recapture rate of 100.4%.

Portfolio Activity

The company made solid property acquisitions in the quarter that are leased to mainly investment grade rated tenants. During the reported quarter, Realty Income invested $509.8 million in 174 new properties and properties under development or expansion, situated in 27 states. The assets are fully leased, with a weighted average lease term of around 14 years, and an initial average cash lease yield of 6.2%. Around 85% of the rental revenues from acquisitions reported during the quarter came in from investment grade-rated tenants.

On the other hand, during the quarter, the company sold 14 properties for $13.8 million, with a gain on sales of $3.2 million.


Finally, Realty Income exited first-quarter 2018 with cash and cash equivalents of $20.6 million, down from $6.9 million at the end of 2017.

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 Mar 31, 2018, Realty Income had borrowing capacity of $918 million available on its revolving credit facility.

Moreover, the borrowing capacity of the revolving credit facility improved to $1.4 billion, subsequent to the use of proceeds from the April notes offering to payback borrowings under the revolving credit facility.

Furthermore, Realty Income raised $2.3 million from the sale of common stock at a weighted average price of $51.08 per share during the first quarter.


For full-year 2018, Realty Income reiterated its adjusted FFO per share of $3.14-$3.20. The Zacks Consensus Estimate for the same is currently pegged at $3.16.

Our Take

Realty Income’s high occupancy of its properties in the first quarter looks impressive. Notably, dwindling mall traffic amid shift of consumers toward online channels, store closures and bankruptcy of retailers have emerged as pressing concerns for most retail REITs, including Kimco Realty Corp. KIM, GGP Inc. GGP and Macerich Company MAC. However, not all firms are affected, as a few companies are gaining even in this dismal scenario, backed by the robust business models.

In fact, this freestanding retail REIT — Realty Income — 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 and competition from Internet retailing. Furthermore, the company’s solid underlying real estate quality and prudent underwriting at acquisitions have helped maintain its high occupancy levels consistently. Additionally, its same-store rent growth displayed limited operational volatility. Also, the company adheres to a conservative capital structure.

Nevertheless, substantial exposure to single-tenant assets increases risks associated with tenant default. In addition, generation of notable rental revenues from assets leased to drug stores and rate hikes are other key 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.

The stock has appreciated 7.8% over the past three months, versus the 1.2% loss incurred by its industry.

Realty Income Corporation Price, Consensus and EPS Surprise

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

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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