Health Care REIT Inc. (HCN), a real estate investment trust (REIT) that operates senior housing and health care real estate, reported fiscal 2010 recurring fourth quarter funds from operations (FFO) of 75 cents per share, which missed the Zacks Consensus Estimate by 2 cents. Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
We cover below the results of the recent earnings announcement, as well as the subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.
Earnings Report Review
Total revenues during the reported quarter were $202.5 million compared to $141.4 million in the year-earlier quarter. Total revenues for the reported quarter were well ahead of the Zacks Consensus Estimate of $187 million.
For full year 2010, total revenues were $680.5 million compared to $546.1 million in 2009. Total revenues for the reported fiscal exceeded the Zacks Consensus Estimate of $657 million.
During the quarter, Health Care REIT invested $1.6 billion in healthcare facilities, bringing fiscal year 2010 tally to $3.2 billion. For full year 2010, the company had earlier expected gross investment in the range of $2.3 billion – $2.7 billion. During the reported fiscal, the company forged new business partnerships with 23 premier senior housing and health systems operators.Earnings Estimate Revisions - Overview
Fiscal earnings estimates have moved in both directions for Health Care REIT since the earnings release, meaning that analysts are neutral about the long-term performance of the company. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
In the last 7 days, fiscal 2011 earnings estimates were raised by 2 analysts out of 16 covering the stock, while 4 had lowered the same. For fiscal 2012, 2 out of 14 analysts covering the stock have revised their estimates upward, while 2 have lowered it during the same time period. This indicates no clear directional movement for the fiscal year earnings and signifies that the analysts hold a circumspect outlook regarding the long-term earnings of the company.
Magnitude of Estimate Revisions
Earnings estimates for fiscal 2011 have remained stagnant in the last 7 days at $3.33. For full year 2011, Health Care REIT expects FFO in the range of $3.25 – $3.35 per share. For fiscal 2012, earnings estimates have decreased by 2 cents to $3.52 during the same time period. Management expects a steady improvement in the overall results of the company through a well-balanced portfolio of higher growth senior housing operating assets and stable revenue-generating medical office buildings.
The long-term earnings estimate picture for Health Care REIT is neutral. Health Care REIT usually has long-term triple-net leases in senior housing and healthcare real estate properties that insulates it from market volatility and provides a steady revenue stream.The healthcare sector is also one of the more recession-proof real estate sectors and has continually fared comparatively better than other sectors during the commercial real estate downturn.
In addition, an aging Baby Boomer generation’s demand for assisted and independent living facilities should increase in the coming years. With a significant presence in these property types, Health Care REIT is in a relatively strong position than most of its competitors.
However, one of the biggest risks to healthcare focused REITs is government reimbursement rates which is planned to be reduced in the coming years. Deep cuts in Medicare have been proposed over the next five years by reducing or freezing payments to skilled nursing facilities, hospitals, and other healthcare providers. With a large portion of revenues being determined by government payout rates, forces beyond the company’s control could negatively affect revenue and operator coverage ratios.
We maintain our ‘Neutral’ rating on Health Care REIT, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold’ rating, indicating that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months. We also have a ‘Neutral’ recommendation and a Zacks #3 Rank for Nationwide Health Properties Inc. (NHP), one of the competitors of Health Care REIT.