There have been several negative catalysts for the healthcare real estate industry in the past few weeks, including lowered guidance and poor results from Welltower's (HCN +0.12%) peers and operating partners. As a result, the stock has been absolutely clobbered -- down nearly 20% so far in 2016. With Welltower scheduled to report its fourth-quarter and year-end 2015 earnings before the bell on Thursday, Feb. 18, here's what investors should keep a close eye on.
It's not about the 2015 results
In its most recent earnings release, Welltower increased its 2015 guidance for normalized FFO to $4.32-$4.37 per share, which would represent a healthy 5%-6% increase over 2014's results. I see no reason to believe they won't achieve this goal.
The more important thing to note is the company's guidance for 2016. Many of Welltower's peers and operating partners have reported dismal guidance and results so far in earnings season, and there is a lingering (legitimate) fear that this could adversely affect Welltower's performance.
For example, Brookdale Senior Living (BKD +0.66%) is one of Welltower's largest partners, operating 7.3% of the REIT's investment portfolio. For the fourth quarter, Brookdale reported a net loss of $174.3 million, or $0.94 per share, and a loss of $2.48 per share for the entire year. A closer look at Brookdale's numbers is particularly concerning. Its senior housing revenue dropped year over year and occupancy fell by 150 basis points -- and senior housing is Welltower's bread and butter. To make matters worse, Brookdale's guidance for 2016 was for CFFO (cash from facility operations) of $2.45-$2.55, short of the market's consensus of $2.62.
The point is that Welltower's 2016 guidance will let investors know just how much of an impact these results are expected to have on the company's bottom line. Strong guidance could put investors' minds at ease, while poor expectations could be another leg down for the stock price.
Comments on sector weakness
Welltower has a great investment strategy, a rock-solid balance sheet, and geographic diversity, even outside of the U.S. So, I'm not too worried about any of those aspects of the company.
What I'm particularly curious about is what management has to say about the current healthcare real estate environment. It's virtually guaranteed to be talked about at some length in the company's conference call, so here are the two main questions I'd like answers to:
- Will the less-than-stellar guidance of Brookdale and other operating partners affect Welltower's rental income, occupancy, or growth plan?
- If so, will this be short-lived or is this a long-term trend?
In addition to comments on the current state of the market, I'll be paying attention to what's said about favorable demographic trends, as well as plans to continue the aggressive expansion into Canada and the U.K.
To sum it up
In the interest of full disclosure, I'm a Welltower shareholder and have written favorably on the stock many times. (Here is one recent example.) Even with the sector weakness, I wholeheartedly believe that Welltower is best-in-breed and that the long-term trends are extremely favorable for Welltower and its peers.
If Welltower's 2016 guidance and overall tone are optimistic, it may be enough to set shareholders' minds at ease. On the other hand, if it appears that Welltower will indeed be adversely affected (entirely possible), it could provide an even better opportunity to get into this long-term winner at a discount.
