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What's in the Cards for Welltower (HCN) in Q2 Earnings?

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Welltower Inc. is slated to report second-quarter 2017 results, before the market opens on Jul 28. Its funds from operations (“FFO”) per share and revenues might see a year-over-year decline.

Last quarter, this healthcare real estate investment trust (“REIT”) delivered an in-line performance. The company also recorded adjusted senior housing operating same-store net operating income (NOI) growth of 1.9% year over year.

Over the trailing four quarters, Welltower posted in-line FFO in one occasion and beat estimates in the other three, recording an average positive surprise of 0.9%. The graph below depicts this surprise history:

Welltower Inc. Price and EPS Surprise


Welltower Inc. Price and EPS Surprise | Welltower Inc. Quote

In addition, year to date, Welltower’s stock has outperformed the industry it belongs to. While the company’s shares gained 9.3%, the industry rallied 4.3%.

Let’s see how things are shaping up for this announcement.

Factors to Influence Q2 Results

Welltower’s efforts to enhance its healthcare real estate portfolio quality through prudent asset allocation and disposal, along with its diversified portfolio, are anticipated to boost its performance in the quarter to be reported. Additionally, rising senior citizen population will likely prove conducive to growth.

The company establishes business relationships with experienced healthcare management companies or operators who lease its properties on a long-term basis, cushioning it from short-term market shocks. Also, the healthcare sector is relatively immune to macroeconomic headwinds faced by the office, retail and apartment companies, in turn, offering stability to Welltower amid market volatility.

However, interest rate hike remains a concern for Welltower due to its high exposure to long-term leased assets. Any rise in rates escalates the cost of financing acquisitions, investment and development activity expenses, and lowers the amount that third parties would be ready to pay for the company’s assets at disposal.

In addition, increased deliveries in certain markets are likely to adversely affect the company's pricing power and occupancy. Further, intense competition from national and local healthcare operators curtails the company’s power to significantly improve its top line and ink deals at attractive rates.

As part of its portfolio-repositioning efforts, Welltower has been aggressively disposing its assets and acquiring new ones. Though such efforts are commendable, the earnings dilutive effects and upfront costs involved cannot be bypassed.

Furthermore, Welltower’s activities during the quarter failed to gain adequate analyst confidence. The Zacks Consensus Estimate for funds from operations for the second quarter edged down 0.94% over the last 60 days.

Earnings Whispers

Our proven model does not conclusively show that Welltower will likely beat estimates this season. 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. However, 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.)

Zacks ESP: The Earnings ESP for Welltower is 0.00%. This is because the Most Accurate estimate of $1.05 comes in line with the Zacks Consensus Estimate.

Zacks Rank: Kimco currently has a Zacks Rank #4, which actually reduces the predictive power of ESP.

Stocks That Warrant a Look

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

CyrusOne Inc (CONE - Free Report) , expected to release earnings on Aug 2, has an Earnings ESP of +2.70% and a Zacks Rank #2.

Condor Hospitality Trust, Inc. (CDOR - Free Report) , likely to release second-quarter results on Aug 7, has an Earnings ESP of +16% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Boston Properties, Inc. (BXP - Free Report) , expected to release quarterly numbers on Aug 1, has an Earnings ESP of +0.62% and a Zacks Rank #3.

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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