What's In Store For Welltower (WELL) This Earnings Season?

Welltower, Inc. (NYSE:WELL) is scheduled to report third-quarter 2019 results on Oct 28, after the market closes. While the company’s revenues are expected to reflect year-over-year (y/y) growth, its funds from operations (FFO) per share is expected to have remained flat.

In the last reported quarter, this Toledo, OH-based healthcare real estate investment trust (REIT) reported normalized FFO per share of $1.05, surpassing the Zacks Consensus Estimate by a penny. Results reflected healthy same-store net operating income (SSNOI) performance of its seniors housing triple-net, outpatient medical and long-term/post-acute care segments.

Further, Welltower delivered an average positive surprise of 0.25%, 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

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

Factors at Play

The July-September period marked a busy transaction period for Welltower. The company is banking on the solid market to prune its portfolio, repositioning it for growth. In July, it announced a series of transactions to acquire seniors housing assets, medical office buildings (MOBs), and expand collaborative relationships with third-party operators.

In fact, as health care trends are shifting from hospitals and other high-cost care settings, seniors housing communities are emerging as an increasingly important alternative. Hence, Welltower has strengthened its seniors housing portfolio backed by strategic transactions, which is anticipated to have aided the company’s third-quarter performance.

Notably, revenues from resident fees and services for the quarter are projected at $932 million, suggesting 6.5% y/y growth.

Moreover, fundamentals of the seniors housing industry remained favorable nationwide during the third quarter, supported by decent occupancy and demand.

Data from the National Investment Center for Seniors Housing & Care (NIC) indicates that seniors housing occupancy rate in the United States registered a sequential expansion of 30 basis points (bps) to 88% during the quarter. This was aided by increase in occupancy at independent living (IL) properties and assisted living (AL) properties. As compared with the prior quarter, third-quarter occupancy at IL properties advanced 20 bps to 90.2%, while the same at AL properties climbed 30 bps to 85.4%.

Although developers have been adding seniors housing properties to the market, in a bid to benefit from the upcoming silver tsunami, rising construction costs and lower development yields have cooled down the construction pipeline. The 30-basis point sequential decline in annual inventory growth during the quarter under review highlights the decline in construction starts for new seniors housing units.

Sluggish growth in development activity, along with favorable demand trends, will likely have aided performance of healthcare REITS in third-quarter 2019.

Further, Welltower has been making acquisitions in its MOB portfolio. Given the better risk/reward profile as compared to senior housing, benefits from its MOB investments are expected to have contributed to the company’s quarterly revenues.

In fact, the Zacks Consensus Estimate for third-quarter 2019 revenues is pegged at $1.31 billion, indicating 6.1% growth on a y/y basis.

Nonetheless, the NIC data suggests annual rent growth for seniors housing properties shrunk 30 bps sequentially to 2.7% during the September-end quarter. We believe, this, along with management’s expectation of higher insurance premiums and tough comp in second-half 2019, will likely have moderated SSNOI growth for its seniors housing operating portfolio during the quarter under review.

In addition, the company exited its Benchmark Senior Living’s portfolio during the quarter for $1.8 billion. This is likely to have resulted in earnings dilution. Also, elevated laborcostsmight have put pressure on its bottom-line growth for the third quarter.

In fact, prior to the third-quarter earnings release, the company has been witnessing downward estimate revisions. As such, the Zacks Consensus Estimate of FFO per share for the quarter to be reported has been revised marginally downward to $1.04 over the past week, reflecting analysts’ bearish sentiments.

Earnings Whispers

Our proven model predicts a positive surprise in terms of FFO per share for Welltower this time around. A positive Earnings ESP is a meaningful and leading indicator of a likely beat. This, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), makes us reasonably confident of a positive surprise.

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

Earnings ESP: Welltower’s Earnings ESP is +0.11%.

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

You can see the complete list of today’s Zacks #1 Rank stocks here.

Other 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:

Digital Realty Trust, Inc. (NYSE:DLR) , scheduled to release earnings on Oct 29, has an Earnings ESP of +2.61% and carries a Zacks Rank of 3, at present.

Senior Housing Properties Trust (NASDAQ:SNH) , slated to report July-September quarter results on Nov 7, has an Earnings ESP of +3.23% and currently holds a Zacks Rank of 2.

Stag Industrial, Inc. (NYSE:STAG) , set to release quarterly figures on Oct 30, has an Earnings ESP of +1.1% and carries 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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