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Is Recovery in the Cards for Welltower (WELL) in Q1 Earnings?

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Welltower, Inc. (WELL - Free Report) is scheduled to report first-quarter 2021 results on Apr 28, 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 9.1% with respect to normalized FFO per share. While gains on real estate disposals aided better-than-expected FFO per share, the company’s seniors housing operating (“SHO”) portfolio continued to be affected by the coronavirus pandemic-led occupancy erosions.

Over the preceding four quarters, Welltower beat the Zacks Consensus Estimate on all occasions, the average surprise being 4.4%. 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 prior to the first-quarter earnings release.

In first-quarter 2021, the pace of vaccine administration among senior housing residents increased.  Moreover, the majority of senior housing communities restarted new admission and in-person tour activities. In fact, in March, the Centers for Medicare & Medicaid Services relaxed restrictions on senior housing visitations, given the high vaccination rates among senior housing residents.

Since restriction on non-essential visits has been a major bummer for occupancy recovery at senior housing facilities, the relaxation is likely to have been a breather for REITs like Welltower, Ventas (VTR - Free Report) , New Senior Investment Group (SNR - Free Report) , Diversified Healthcare Trust (DHC - Free Report) , which have meaningful seniors housing exposures.

While vaccination has reduced COVID-19 case counts, it has not translated to occupancy revival and this continued to cast a pall on senior housing fundamentals in first-quarter 2021. NIC-MAP’s first-quarter 2021 senior housing data reiterates these concerns, with report indicating seniors housing occupancy plunging to a record-low of 78.8% in first-quarter 2021. This marks a roughly 180 basis points (bps) decline from the previous quarter. This also marks the sixth consecutive quarter of occupancy decline and the fourth one since the onset of the pandemic.

Moreover, annual rent growth and annual absorption sequentially fell 70 bps and 190 bps to 0.9% and negative 7.4%, respectively.

Amid these concerns, Welltower’s SHO portfolio performance was dismal in the January-March period. In fact, the company witnessed an approximately 240-bps sequential occupancy loss at its SHO portfolio in first-quarter 2021 to 74%. While this is encouraging when compared with management’s first-quarter expectation of a sequential decline of 275-375 bps, it is higher than the 210-bps decline witnessed in the fourth quarter of 2020.

Moreover, while low cases at facilities are likely to have aided in move-in activity, it is still below pre-pandemic levels. This translates to low resident admissions and revenues from resident fees and services.

Notably, the Zacks Consensus Estimate for first-quarter resident fees and services is pegged at $697 million, indicating a 2.4% decline from the prior-quarter reported figure. Moreover, the same for revenues from the SHO portfolio is pegged at $682 million, indicating a 3% decline from the quarter-earlier reported number.

Such occupancy declines combined with continued pandemic-related property level expenses are expected to have led to further margin erosions.

Also, the company has continued its capital-recycling activities in the first quarter to finance near-term investment and development opportunities. In this period, it completed $209 million of pro-rata acquisitions and $216 million of pro-rata dispositions. While acquisitions are likely to drive its earnings in the future, the disposal of assets is likely to have resulted in lost revenues from such sales, dilution in earnings and a reduction in cash flows in first-quarter 2021.

Encouragingly, in the quarter, Welltower made efforts to enhance its balance sheet and extend debt maturities. In fact, in the March-end quarter, it issued $750 million of 2.800% senior unsecured notes due June 2031 and expects to use proceeds in part to fully redeem the remaining outstanding unsecured senior notes due in 2023 and for general corporate purposes.

As of Mar 31, 2021, its near-term liquidity stood at $4.76 billion, consisting of $1.76 billion of cash and cash equivalents, and $3 billion of capacity remaining under its line of credit.Moreover, Welltower’s debt maturities are well-laddered with a weighted average maturity of 7.8 years, enhancing its financial flexibility.

Amid these, total revenues for the first quarter are pegged at $1.09 billion, suggesting a fall of 13.3% from the prior-year reported number.

Prior to the first-quarter earnings release, the Zacks Consensus Estimate for the first-quarter FFO per share has been revised marginally upward to 75 cents over the past month, indicating bullish sentiments of analysts. However, it indicates a decline of 26.5% from the year-earlier reported figure.

Here is what our quantitative model predicts:

Welltower has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of a FFO beat.

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

Earnings ESP: The Earnings ESP for Welltower is +0.93%.

Zacks Rank: Welltower currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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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