Will Welltower (WELL) Break Its Beat Streak in Q2 Earnings?

Welltower, Inc. WELL is scheduled to report second-quarter 2020 results on Aug 5, 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 0.99% with respect to the FFO per share. The company’s seniors housing operating (SHO) portfolio was severely impacted by the coronavirus pandemic. In fact, this segment witnessed $7 million of unexpected property-level expenses related to the COVID-19 outbreak in March 2020.

Over the preceding four quarters, the company beat the Zacks Consensus Estimate on all occasions, the average surprise being 0.97%. 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 second-quarter earnings release.

The second quarter of 2020 is the first quarter wherein the full impact of the coronavirus pandemic and its related lockdown-induced damage to the period’s earnings are likely to have been visible. As for the seniors housing industry is concerned, the same continued to grapple with the rampant pandemic that resulted in occupancy and rental rate erosions. In fact, seniors housing occupancy in the second quarter declined 280 basis points (bps) sequentially to 84.9%, per the National Investment Center for Seniors Housing & Care (NIC) data. This was the maximum quarterly decrease in 14 years, making the occupancy rate the lowest on record.

Moreover, the annual absorption rate turned negative to -0.5% during the quarter versus 3% growth registered in first-quarter 2020. The decline in occupancy and absorption is expected to have decelerated rent growth. In fact, annual rent growth for the quarter was 84.9%, down from 87.7% observed in the March quarter.

These setbacks are expected to have impacted Welltower’s seniors housing operating and triple-net segments.

In fact, the company witnessed a decline in move-ins and tour limitations during the second quarter. Against this backdrop, it expects SHO portfolio occupancy to witness a sequential decline of 500-600 bps in the second quarter.

This downside is further likely to have affected resident fees and services as well as SHO revenues. In fact, the Zacks Consensus Estimate for second-quarter resident fees and services is pinned at $845 million, indicating a 7.5% decline from the year-ago reported figure. Moreover, the same for revenues from the SHO portfolio is pegged at $836 million, indicating a 5% to from the year-earlier reported number.

While the senior housing industry was already cut to the bone for expenses, a host of measures undertaken to contain the spread of the pandemic at seniors housing facilities exacerbated the issue. In fact, Welltower’s SHO portfolio experienced higher operating expenses on account of elevated labor expenses and procurement costs of personal protective equipment. With this, the company estimates total SHO portfolio expense for the June quarter to increase 5% sequentially.  

Hence, declining revenues and higher operating expenses are likely to have dented the SHO portfolio’s net operating income (NOI) margin.

Moreover, the Zacks Consensus Estimate for revenues from triple net segment is pinned at $188 million, indicating a significant decline from $240.8 million reported in the prior-year quarter.

Amid these, total revenues for the second quarter are pegged at $1.23 billion, suggesting a fall of 6.8% from the prior-year reported number.

Nevertheless, outpatient medical facilities are likely to have reopened for elective procedures during the second quarter, supporting revenues from outpatient medical segment. In fact, the Zacks Consensus Estimate for the same stands at $194 million, implying no change from the prior-quarter’s reported figure. 

Lastly, prior to the second-quarter earnings release, there is lack of any solid catalyst for becoming optimistic about the company’s prospects. In fact, the Zacks Consensus Estimate for the quarterly FFO per share has moved 6.7% south to 84 cents over the past month, hinting at a decline of 20% 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 #3 and an Earnings ESP of -1.88%.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 in the REIT sector as our model shows that these have the right combination of elements to deliver a positive surprise this time around:

SBA Communications Corporation SBAC, slated to release results on Aug 3, has an Earnings ESP of +4.48% and a Zacks Rank of 3, at present.

Healthcare Trust of America, Inc. HTA, set to report quarterly numbers on Aug 6, currently has an Earnings ESP of +0.96% and a Zacks Rank of 3.

National Storage Affiliates Trust NSA, set to report quarterly numbers on Aug 6, presently has an Earnings ESP of +0.44% and is Zacks #3 Ranked.

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.

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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.

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