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Factors Setting the Tone for Welltower's (WELL) Q2 Earnings

Zacks Equity Research

Welltower, Inc. WELL is scheduled to report second-quarter 2019 results on Jul 31, after the market closes. The company’s results will likely reflect year-over-year (y/y) 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) posted reported normalized FFO per share of $1.02, in line with the Zacks Consensus Estimate. Results reflected healthy performance of its seniors housing triple-net, outpatient medical and long-term/post-acute care segments.

Further, Welltower delivered an average positive surprise of 0.26%, in the last four quarters, surpassing estimates twice, missing on one occasion and meeting in the other. The graph below depicts this surprise history:

Welltower Inc. Price and EPS Surprise

Welltower Inc. Price and EPS Surprise

Welltower Inc. price-eps-surprise | Welltower Inc. Quote

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

Factors at Play

Data from the National Investment Center for Seniors Housing & Care (NIC) indicates that fundamentals of the seniors housing industry weakened nationwide during the second quarter, with occupancy rates dropping to the lowest level occupancy level since second-quarter 2011.

In fact, senior housing occupancy rate in the United States decreased to 87.8% during the quarter under review, indicating a sequential decline of 20 basis points (bps). Additionally, annual rent growth shrunk 20 bps sequentially to 2.9%.

Further, existing excess speculative supply of seniors housing properties has likely dampened seniors housing fundamentals. Hence, lackluster senior housing fundamentals will likely result in a decline in Welltower’s revenues from the seniors housing operating portfolio. The Zacks Consensus Estimate for second-quarter revenues from seniors housing operating portfolio is pegged at $842 million, calling for a sequential decline of 3.4%.

Although developers have been adding senior housing properties to the market at an aggressive pace since 2014, rising construction costs and lower development yields have cooled down the construction pipeline recently. The 10-bps decline in annual inventory growth during the quarter underlines this downward trend in construction starts for new senior housing units.

Further, the demographic-driven demand boom from the aging boomer generation remains the most significant tailwind for healthcare REITs. Specifically, this generation is a wealthier cohort, anticipated to lead longer lives, thereby, consuming healthcare at a rate far exceeding prior generational peers.

Hence, Welltower has made dedicated efforts to enhance its portfolio. During the June-end quarter, it closed the previously-announced buyout of a portfolio of Class A health care facilities for $1.25 billion from CNL Healthcare Properties. The accretive acquisition will enable the company to expand its outpatient medical and health system footprint across 16 states.

Therefore, the company is anticipated to benefit from its efforts to strengthen the seniors housing portfolio. In fact, the Zacks Consensus Estimate for second-quarter net operating income from senior housing operating portfolio is pinned at $280 million, suggesting 26% sequential improvement. Further, second-quarter rental income of $383 million indicates marginal growth as compared to the prior-quarter tally.

Lastly, prior to the April-June quarter earnings release, there was lack of any solid catalyst for becoming overtly optimistic about the company’s business activities and prospects. As such, the Zacks Consensus Estimate of FFO per share for the quarter remained unchanged at $1.04, over the past 30 days. Nonetheless, it calls for y/y growth of 4%.

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 0.00%.

Zacks Rank: The company currently carries a Zacks Rank of 3.

Stocks That Warrant a Look

CyrusOne Inc. CONE, scheduled to release earnings on Aug 1, has an Earnings ESP of +1.37% and carries a Zacks Rank #3, at present.

Corporate Office Properties Trust OFC, slated to report quarterly figures on Jul 29, has an Earnings ESP of +0.66% and carries a Zacks Rank of 3, currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

Healthcare Realty Trust Incorporated HR, set to release June-end quarter results on Jul 30, has an Earnings ESP of +0.72% and currently holds a Zacks Rank #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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