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Welltower (WELL) Gears Up for Q4 Earnings: What's in Store?

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Welltower, Inc. (WELL - Free Report) is scheduled to report fourth-quarter and full-year 2019 results on Feb 12, after the market closes. The company’s revenues and funds from operations (FFO) per share are expected to reflect year-over-year growth.

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.

Welltower reported an average negative surprise of 0.01% 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

Data from the National Investment Center for Seniors Housing & Care (NIC) indicates that during fourth-quarter 2019, fundamentals of the U.S seniors housing sector remained healthy. This was supported by a seasonal uptick in occupancy, robust net absorption and moderating new construction. Usually, demand for senior housing space increases in the fourth quarter relative to the third quarter and is generally the year’s strongest.

Nationwide occupancy expanded 10 basis points (bps) to 88% at the end of fourth-quarter 2019, with San Jose and New York recording the highest occupancy rates.

Further, for 2019, net absorption aggregated 15,643 units, the highest level recorded since 2006. This was supported by strong demand and a slowdown in construction activity. Additionally, 17,718 new construction starts in 2019 were recorded in NIC’s primary markets. This was the lowest level of new starts since 2014.

With a strong portfolio of senior housing assets in strategic markets, Welltower seems well poised to have gained from the favorable senior housing environment during the soon-to-be-reported quarter. The company has been enhancing its senior housing operating portfolio (SHOP) quality through 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 high barrier-to-entry urban markets.

This is expected to have resulted in superior RevPOR gains in the quarter to be reported. Further, the Zacks Consensus Estimate for fourth-quarter NOI from the SHOP segment is pegged at $271 million, indicating year-over-year growth of around 27%.

A significant increase in outpatient visits and growing need for value-based care is expected to boost the company’s revenues from its outpatient medical segment. Cash rent commencement at newly-leased properties is expected to have driven 30% growth in revenues from outpatient medical properties. 

Moreover, the Zacks Consensus Estimate for fourth-quarter 2019 revenues is pegged at $1.25 billion, indicating 0.3% growth on a year-over-year basis.

Although development starts moderated in the fourth quarter, supply level of seniors housing assets are elevated. This is expected to have impacted Welltower’s performance in the December-end quarter. In fact, high supply might have curtailed the company’s pricing power and limited resident fee income, thereby impeding segmental revenue growth.

The Zacks Consensus Estimate for fourth-quarter 2019 revenues from the SHOP segment is pegged at $826 million, suggesting marginal fall on a year-over year and sequential basis.

Also, continuing elevated laborcostsmight have strained its bottom-line growth in the fourth quarter.  

In fact, prior to the fourth-quarter earnings release, the company has been witnessing downward estimate revisions. As such, the Zacks Consensus Estimate for the quarterly FFO per share has been revised marginally downward to $1.04 over the past month, reflecting analysts’ bearish sentiments. Nonetheless, it represents year-over-year growth of around 3%.

Earnings Whispers

Our proven model does not conclusively predict a positive surprise in terms of FFO per share for Welltower this time around. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), which 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.

Earnings ESP: Welltower’s Earnings ESP is +0.90%.

Zacks Rank: The company currently carries a Zacks Rank of 4 (Sell).

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

Stocks That Warrant a Look

Here are a few stocks worth considering from the REIT sector as our model shows that these have the right combination of elements to deliver a positive surprise this reporting cycle:

Healthpeak Properties, Inc. PEAK, slated to release fourth-quarter earnings on Feb 11, has an Earnings ESP of +1.15% and carries a Zacks Rank #3 at present.

Equinix, Inc. EQIX, set to report quarterly numbers on Feb 12, has an Earnings ESP of +0.53% and holds a Zacks Rank of 3, currently.

Host Hotels & Resorts, Inc. HST, scheduled to release October-December period results on Feb 19, has an Earnings ESP of +1.52% and is currently a Zacks #3 Ranked stock.

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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