Welltower (NYSE:WELL), Inc. WELL is scheduled to report fourth-quarter and 2020 results on Feb 9, after market close. The company’s results are expected to reflect a year-over-year decline in quarterly 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 surprise of 3.7% with respect to normalized FFO per share. However, the company’s seniors housing operating (“SHO”) portfolio was severely impacted by the pandemic-led occupancy erosions. In fact, the segment witnessed $17 million of property-level expenses in the fourth quarter related to the virus outbreak.
Over the preceding four quarters, the company beat the Zacks Consensus Estimate on all occasions, the average surprise being 2.3%. The graph below depicts this surprise history:
Let’s see how things have shaped up prior to the fourth-quarter earnings release.
While the seniors housing industry beats back the pandemic through vaccination, immediate recovery is less likely. Welltower’s fourth-quarter performance is expected to have continued to bear the brunt of occupancy pressure and rent growth deceleration.
NIC-MAP released fourth-quarter 2020 senior housing data reiterates these concerns with data indicating seniors housing occupancy in the fourth quarter declined 130 basis points (bps) sequentially to 80.7%. Occupancy losses also resulted in worsening net absorption. In fact, net absorption was -5.4% during the fourth quarter compared with -3.8% in third-quarter 2020.
Moreover, annual rent growth decelerated to 1.4% during the quarter as compared to 1.7% in third-quarter 2020. Also, while the current government support has been helpful for senior housing operators, it was not enough to negate the implications of COVID-19.
Amid these concerns, Welltower’s seniors housing operating (“SHO”) portfolio performance was dismal in the October-December period. In fact, the company noted approximately 220 bps sequential occupancy loss at its SHO portfolio during fourth-quarter 2020 from 78.4% to 76.2%.
The surge in COVID-19 cases in the second half of fourth-quarter 2020 exacerbated the seasonal slowdown in move-in activity. This along with unfavorable trends in move-outs is anticipated to have resulted in such occupancy losses. The seasonally weak winter months too have not helped Welltower’s performance in the fourth quarter, and are anticipated to have dampened rental rate growth and SHO revenue growth.
In fact, the Zacks Consensus Estimate for fourth-quarter resident fees and services is pinned at $745 million, indicating a 10.5% decline from the prior-quarter reported figure. Moreover, the same for revenues from the SHO portfolio is pegged at $740 million, indicating an 8% decline from the year-earlier reported number.
Such occupancy declines combined with the significant fixed costs are expected to have led to further margin erosions.
Encouragingly, the company’s triple-net assets have been holding up much better than the SHO portfolio with strong rent collections. In fact, in its triple-net portfolio, it collected 97% of rent due in the fourth quarter.
Moreover, decent rent collection and high levels of occupancy in its outpatient medical portfolio indicate a robust recovery. Specifically, it collected in cash or deferred 97% of rent due for the fourth quarter. Additionally, with outpatient medical portfolio occupancy of 93.7% as of 2020 end, tenant retention remains above the historical average rate at approximately 91% and 88% in the fourth quarter and 2020, respectively.
However, as part of its portfolio-repositioning and liquidity-enhancing efforts, Welltower is disposing of its assets. In fact, the company has been actively selling assets, with pro-rata dispositions in the fourth quarter and 2020 aggregating $674 million and $3.7 billion, respectively.
This demonstrates strong demand for its high-quality assets despite the challenges raised by the pandemic. Moreover, in light of the prolonged weakness in the seniors housing business, such sales enable the company to reduce exposure to such assets, while sale proceeds generated will help to de-lever its balance sheet.
While such efforts are strategic fits for the company over the long term, revenues lost from such sales, the dilution in earnings and reduction in cash flows are likely to affect fourth-quarter and 2020 results.
Amid these, total revenues for the fourth quarter are pegged at $1.12 billion, suggesting a fall of 11.3% from the prior-year reported number.
Prior to the fourth-quarter earnings release, the Zacks Consensus Estimate for the fourth-quarter FFO per share has been revised marginally downward to 77 cents over the past week, indicating bearish sentiment of analysts. Moreover, it indicates a decline of 26.7% from the year-earlier reported figure.
For the year, the Zacks Consensus Estimate for FFO per share has been revised marginally south over the past week to $3.50. The figure indicates a 15.9% year-over-year decrease on revenue estimate of $4.58 billion.
Here is what our quantitative model predicts:
Our proven model does not conclusively predict a beat in terms of FFO per share for Welltower this reporting cycle. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a positive FFO surprise. 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 has a Zacks Rank #4 (Sell) and an Earnings ESP of -0.99%.
You can see the complete list of today’s Zacks #1 Rank stocks here.
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 surprise this quarter:
Healthpeak Properties (NYSE:PEAK), Inc. PEAK, set to report quarterly numbers on Feb 9, currently has an Earnings ESP of +4.40% and a Zacks Rank of 3.
Hudson Pacific Properties (NYSE:HPP), Inc. HPP, slated to release quarterly earnings on Feb 17, has an Earnings ESP of +0.76% and a Zacks Rank of 3 at present.
WashREIT WRE, slated to release quarterly earnings on Feb 11, has an Earnings ESP of +0.59% and a Zacks Rank of 3 at present.
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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