Markets

Will Seniors Housing Woes Mar Welltower's (WELL) Q3 Earnings?

Welltower, Inc. WELL is scheduled to report third-quarter 2020 results on Oct 28, after market close. The company’s results will likely reflect a year-over-year decline in 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 3.6% with respect to normalized FFO per share. However, the company’s seniors housing operating (“SHO”) portfolio was severely impacted by the coronavirus pandemic. In fact, the segment witnessed $37 million of property-level expenses in the third quarter related to the virus outbreak.

Over the preceding four quarters, the company beat the Zacks Consensus Estimate on all occasions, the average surprise being 1.6%. 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 third-quarter earnings release.

During third-quarter 2020, the seniors housing industry continued to bear the brunt of the rampant spread of coronavirus that resulted in occupancy and rental rate erosions as well as higher expenses. In fact, seniors housing occupancy in the third quarter declined 265 basis points (bps) sequentially to 82.1%, per the National Investment Center for Seniors Housing & Care data.

Moreover, the annual absorption rate was -3.8% during the quarter versus -0.5% in the June-end period. The decline in occupancy and absorption is expected to have decelerated rent growth. In fact, annual rent growth for the quarter was 1.7%, down from 2.1% observed in the April-June period.

The weakness in the seniors housing market is expected to have impacted Welltower’s seniors housing operating and seniors housing triple-net segments.

The operating environment for senior housing properties has remained challenging in the third quarter. To limit the spread of the virus to the elderly, who are more susceptible to it, many facilities were shut down at the onset of the pandemic. This continued to have a negative impact on occupancy that can be attributed to the COVID-related move-outs, low move-ins and admission bans.

In fact, Welltower’s total SHO portfolio occupancy declined 150 bps sequentially in the third quarter to 78.4%. The company’s outlook for the seniors housing operating portfolio occupancy was at a sequential decline of 125-175 bps.

Occupancy loss is further likely to have hindered resident fees and services as well as SHO revenue growth. In fact, the Zacks Consensus Estimate for third-quarter resident fees and services is pinned at $751 million, indicating a 2.7% decline from the prior-quarter reported figure. Moreover, the same for revenues from the SHO portfolio is pegged at $850 million, indicating a 12.4% decline from the year-earlier reported number.

Moreover, expenses have witnessed an uptick due to higher labor costs and required protective-equipment supplies. In fact, the company’s total SHO portfolio incurred high pro-rata pandemic-related property level expenses during the second quarter. This is likely to have continued in the third quarter as well. Elevated expenses are likely to have hindered net operating income (NOI) growth in the quarter under review.

The company’s triple-net portfolio has also been facing operational headwinds similar to the seniors housing operating space, thereby, weakening the near-term performance of tenants and operators. Notably, Genesis Healthcare is uncertain about its ability to continue as a going concern. Hence, Welltower has switched to a cash-basis accounting method for revenue recognition from a straight-line accounting method, beginning with third-quarter 2020. 

Accordingly, the elimination of straight-line recognition is expected to have affected the company’s normalized FFO in the third quarter by $2.2 million. Moreover, the Zacks Consensus Estimate for revenues from the triple net segment is pinned at $199 million, indicating a decline of 19% from the prior-year quarter’s reported figure.

Nonetheless, strong rent collection from the triple-net portfolio is likely to have supported top-line growth. In fact, the company has collected 98% of the third-quarter rent due.

Nonetheless, with outpatient medical buildings reopened and operating with enhanced maintenance and cleaning protocols, the segment is likely to have been a bright spot for the company in the July-September period. The company noted that as of the September end, the outpatient medical portfolio occupancy stood 93.6%. Moreover, it collected or deferred 99% of cash rent due for the month. Further, the tenant retention rate remains above historical averages. Nonetheless, new leasing velocity is expected to have remained uneven amid the pandemic-led challenges.

In fact, the Zacks Consensus Estimate for revenues from the outpatient medical segment stands at $194 million, implying a year-over-year increase of 4.9%.

Amid these, total revenues for the third quarter are pegged at $1.15 billion, suggesting a fall of 9% from the prior-year reported number.

Lastly, prior to the third-quarter earnings release, there is a lack of any solid catalyst for becoming optimistic about the company’s prospects. Notably, the Zacks Consensus Estimate for the quarterly FFO per share has moved 1.2% south to 81 cents over the past month, hinting at a decline of 22.9% from the year-earlier reported figure.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a beat in terms of FFO per share for Welltower this reporting cycle. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a positive FFO surprise. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Welltower currently has a Zacks Rank #4 (Sell) and an Earnings ESP of -0.62%.You can see the complete list of today’s Zacks #1 Rank stocks here.

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 surprise this quarter:

Lexington Realty Trust LXP, set to report quarterly numbers on Nov 5, currently has an Earnings ESP of +1.33% and a Zacks Rank of 3.

National Storage Affiliates Trust NSA, slated to release third-quarter earnings on Nov 5, has an Earnings ESP of +2.88% and a Zacks Rank of 3 at present.

Ventas, Inc. VTR, slated to release third-quarter earnings on Nov 6, has an Earnings ESP of +2.03% and a Zacks Rank of 3 at present.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

More Stock News: This Is Bigger than the iPhone!

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.

Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2021.

Click here for the 6 trades >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Ventas, Inc. (VTR): Free Stock Analysis Report
 
Lexington Realty Trust (LXP): Free Stock Analysis Report
 
National Storage Affiliates Trust (NSA): Free Stock Analysis Report
 
Welltower Inc. (WELL): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research

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

Other Topics

Stocks

Latest Markets Videos

Zacks

Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

Learn More