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What's in the Offing for Welltower's (WELL) Q1 Earnings?

Zacks Equity Research
·6 min read

Welltower, Inc. WELL is scheduled to report first-quarter 2020 earnings on May 6, after market close. While results will likely reflect year-over-year growth in revenues, the funds from operations (FFO) per share might display a decline.

In the last reported quarter, this Toledo, OH-based healthcare real estate investment trust (REIT) delivered a positive surprise of 0.96% with respect to the FFO per share. Results reflected healthy performance of its seniors housing triple-net, outpatient medical, seniors housing operating, and long-term/post-acute care segments.

Over the preceding four quarters, the company beat the Zacks Consensus Estimate on three occasions and met in the other, the average beat being 0.72%. The graph below depicts this surprise history:

Welltower Inc. Price and EPS Surprise
 

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 prior to the first-quarter earnings release.

Factors at Play

According to the data from the National Investment Center for Seniors Housing & Care (NIC), senior housing occupancy decreased slightly to 87.7% in first-quarter 2020 from the prior quarter’s 87.9%, suggesting a relative stability of occupancy leading up to the coronavirus outbreak in March. However, with the coronavirus pandemic, occupancy and construction starts remain challenged.

In the quarter, San Jose (95.0%) and San Francisco (91.5%) recorded the highest occupancy rates, while Houston (82.1%) and Atlanta (82.7%) witnessed the lowest.

Welltower has been enhancing its senior housing operating portfolio quality through the addition of strategic properties and recycling of capital on dispositions. Through these capital-allocation measures, the company improved its operator diversification and expanded geographic footprint in strategic markets. These efforts are likely to have aided the REIT in the quarter under consideration.

However, the company made a number of announcements issuing business updates in light of the coronavirus pandemic and also withdrew its 2020 guidance. The company announced that the senior housing operating portfolio, which generates a significant portion of the net operating income, has been witnessing a decline in occupancy. The occupancy level fell from 85.8% as of Feb 28, to 85.4% as of Mar 27, and this declining trend is likely to prevail, given tour limitations in many of its communities as well as check on resident move-ins.

The company noted that during the first quarter, operating expenses for the senior housing operating portfolio had trended slightly below expectations through February. However, in March, the company incurred about $7 million of unanticipated property level expenses, due to higher labor costs and procurement costs of personal protective equipment (PPE), and other supplies amid the pandemic.

Since the beginning of the year through Apr 17, the company concluded nearly $400 million in pro rata acquisitions and joint ventures at a year one blended rate of 5.6%. The company has also been making dispositions and during the first quarter, it concluded $781 million of pro rata dispositions, of which $64 million related to the disposition of an unconsolidated equity investment. Notably, first-quarter dispositions included $586 million of property sales, which closed in March.

Subsequent to these efforts, Welltower noted that it had $2.15 billion of capacity under its $3-billion unsecured revolving credit facility, $1 billion of capacity under undrawn term loan, and cash and cash equivalents of more than $300 million as of Mar 31, 2020. Also, Welltower has no significant unsecured debt maturities until 2023, thanks to its decent balance-sheet management.

The Zacks Consensus Estimate for first-quarter 2020 revenues from the senior housing operating segment is pegged at $837 million, suggesting a 4% fall on a year-over year basis.

Nevertheless, a significant increase in outpatient visits and the growing need for value-based care is anticipated to boost the company’s revenues from its outpatient medical segment. The estimate for revenues from outpatient medical properties of $176 million suggests an 18.1% increase year on year.

Amid these, total revenues for the first quarter are pegged at $1.28 billion, suggesting year-over-year growth of 0.5%.

However, prior to the first-quarter earnings release, there is lack of any solid catalyst for becoming optimistic about the company’s prospects. The Zacks Consensus Estimate for the quarterly FFO per share moved 1.9% south to $1.01, over the past month. It also suggests a nearly 1% decline year over year.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a positive surprise in terms of FFO per share for Welltower 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 a FFO beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Welltower currently carries a Zacks Rank #3 and has an Earnings ESP of -1.56%.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Extra Space Storage Inc. EXR, slated to release first-quarter earnings on May 6, has an Earnings ESP of +0.21% and carries a Zacks Rank of 3 at present.You can see the complete list of today’s Zacks #1 Rank stocks here.

Americold Realty Trust COLD, scheduled to announce earnings results on May 7, has an Earnings ESP of +9.74% and currently holds a Zacks Rank #3.

VEREIT, Inc. VER, set to report quarterly numbers on May 20, has an Earnings ESP of +5.15% and carries a Zacks Rank of 3 currently.

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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