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Why Is an Earnings Beat Unlikely for Welltower (HCN) in Q4?

Welltower Inc.HCN is slated to report fourth-quarter and 2017 results before the market opens on Feb 22. The company's funds from operations (FFO) per share and its revenues are anticipated to witness a decline year over year.

Last quarter, this healthcare real estate investment trust (REIT) reported better-than-expected FFO per share. Moreover, same-store net operating income from senior housing grew 4.1% year over year in the quarter.

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 1.4%. The graph below depicts the surprise history:

Welltower Inc. Price and EPS Surprise

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

Nonetheless, Welltower's stock has underperformed the industry it belongs to in the past six months. While the company's shares have lost 22.5%, the industry has declined 7%.

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

Factors to Influence Q4 Results

Welltower's strategy of expanding its seniors' housing portfolio in top metro markets, specifically in the West Coast is anticipated to benefit the company in the quarter-to-be-reported. Moreover, the company is set to acquire a portfolio of four rental continuing care retirement communities and convert those to a RIDEA structure.

Further, it has secured a major institutional investor for the development of an assisted living and memory care community in midtown Manhattan. These moves fortify its healthcare asset portfolio.

Welltower's efforts to enhance its healthcare real estate portfolio quality through prudent asset allocation and disposal, along with a diversified portfolio, are anticipated to drive its performance in the quarter under review. Additionally, rising senior-citizen population will likely prove conducive to growth.

Welltower's activities during the quarter could not gain adequate analyst confidence. Consequently, the Zacks Consensus Estimate for Q4 FFO has witnessed downward estimate revision of 0.95% to $1.04 in a month's time. Further, it indicates a decline of 5.5% year over year.

The Zacks Consensus Estimate for fourth-quarter revenues is pegged at $1.08 billion, indicating a year-over-year drop of 0.25%.

For full-year 2017, the Zacks Consensus Estimate for revenues is $4.29 billion, reflecting a marginal rise year over year. The consensus estimate for FFO per share is $4.24, reflecting a year-over-year decline of 6.8%. Management expects core FFO per share in the range of $4.19-$4.25.

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, which represents the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -1.54%.

Zacks Rank: Welltower has a Zacks Rank #4 (Sell).

Moreover, we caution against stocks with Zacks Rank #4 or #5 (Strong Sell) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

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 deliver a positive surprise this time around:

Host Hotels & Resorts, Inc. HST , slated to report quarterly numbers on Feb 21, has an Earnings ESP of +0.25% and a Zacks Rank of 3. You can see the complete list of today's Zacks #1 Rank stocks here .

Outfront Media Inc. OUT , scheduled to release quarterly numbers on Feb 27, has an Earnings ESP of +0.90% and a Zacks Rank of 3.

Gramercy Property Trust GPT , slated to release fourth-quarter results on Feb 28, has an Earnings ESP of +2.49% and a Zacks Rank of 3.

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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