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What to Expect From Welltower's (WELL) Earnings This Season

Zacks Equity Research

Welltower, Inc. WELL is scheduled to report fourth-quarter 2018 results on Feb 12, before the opening bell. The company’s results will likely reflect year-over-year growth in revenues and funds from operations (FFO) per share.

In the last reported quarter, this Toledo, OH-based healthcare real estate investment trust (REIT) delivered a positive surprise of around 2%. Results highlighted healthy same-store net operating income (SSNOI) performance of the company’s senior housing triple-net, outpatient medical and long-term/post-acute care segments.

Further, Welltower posted average positive surprise of 0.01%, in the last four quarters, surpassing estimates twice for as many misses. The graph below depicts this surprise history:

Welltower Inc. Price and EPS Surprise
 


Welltower Inc. Price and EPS Surprise | Welltower Inc. Quote

For 2018, Welltower expects normalized FFO per share to lie in the band of $4.02-$4.07. The Zacks Consensus Estimate for the same is pegged at $4.03.

Let’s see how things have shaped up for this announcement.

Factors at Play

The aging baby boomer population has increased healthcare spending and is spurring demand for senior housing facilities. Hence, Welltower’s efforts to fortify its portfolio of senior housing assets during the Oct-Dec quarter, amid near-term challenges affecting this real estate category, are a strategic fit.

In fact, in December, the company announced acquisition of senior housing assets, amounting to $725 million, at a blended cap rate of 6.6% across four deals. In addition, Welltower has jointly announced its plans with Hines to co-develop a luxury senior living facility, enhancing the Manhattan portfolio of the former.

Amid these, the Zacks Consensus Estimate for fourth-quarter revenues from senior housing operating portfolio is expected to be $885 million, underlining 4.2% sequential growth. Accordingly, net operating income is estimated to witness a sequential rise of 4.5% to $276 million. 

Also, with a solid portfolio of outpatient medical properties, the soaring demand for medical office buildings (MOBs) might have buoyed the company’s operating performance in the quarter. In fact, revenues from medical facilities are projected at $130 million, flat quarter on quarter.

Nonetheless, supply of senior housing assets in the company’s markets remained high during the to-be-reported quarter. Since this curtails landlords’ pricing power and limits growth in occupancy level, we predict the prevalent oversupply situation to have impacted the company’s fourth-quarter performance.

In fact, the Zacks Consensus Estimate for fourth-quarter rental income is $341 million, indicating a marginal decline sequentially.

Furthermore, rising interest rates is another unfavorable development for the company. Since Welltower has substantial exposure to long-term leased assets that are subject to annual escalations and depends on debt for its acquisition financing, we expect the company to witness higher interest expense for the Dec-end quarter. This, in turn, is anticipated to have curbed bottom-line growth.

Lastly, the Zacks Consensus Estimate for fourth-quarter 2018 FFO per share has been revised marginally downward in a month’s time to $1.03. Nonetheless, it indicates year-over-year growth of 0.98%.

Earnings Whispers

Our proven model does not conclusively show that Welltower is likely to 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 at least 3 (Hold) for this to happen. That is not the case here, as you will see below.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earning ESP: Welltower’s Earnings ESP is -0.89%.

Zacks Rank: The company currently carries a Zacks Rank of 3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of the earnings beat.

Stocks That Warrant a Look

While other players in the REIT space are lined up to report their financial results, below are three stocks, poised to beat on earnings per the proven Zacks model. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hersha Hospitality Trust HT, slated to report fourth-quarter results on Feb 25, has an Earnings ESP of +3.81% and holds a Zacks Rank of 2.

American Tower Corporation AMT, set to release earnings on Feb 27, has an Earnings ESP of +0.29% and carries a Zacks Rank of 3.

CyrusOne Inc. CONE, scheduled to report quarterly numbers on Feb 20, has an Earnings ESP of +3.07 and carries a Zacks Rank of 3.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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