Ventas Inc. (NYSE:VTR), a leading healthcare real estate investment trust (REIT), reported fiscal 2010 fourth quarter recurring funds from operations (FFO) of 77 cents per share, which beat 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
Recurring FFO for fiscal 2010 was $454.0 million or $2.88 per share compared to $409.0 million or $2.68 in 2009. The recurring FFO per share for the reported fiscal exceeded the Zacks Consensus Estimate by 2 cents.
Total revenues during the reported quarter were $268.0 million compared to $237.9 million in the year-earlier quarter. Revenues during fourth quarter 2010 were well below the Zacks Consensus Estimate of $275.0 million.
For full year 2010, total revenues were $1.0 billion compared to $931.6 million in the previous year. Total revenues for the reported fiscal were in line with the Zacks Consensus Estimate.Earnings Estimate Revisions- Overview
Fiscal earnings estimates have moved in both directions for Ventas 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 15 covering the stock, while 2 had lowered the same. For fiscal 2012, none out of 13 analysts covering the stock have revised their estimates upward, while 2 have lowered it during the same time period.
This indicates a shade of negative directional movement for the fiscal year earnings and signifies that the analysts are slightly bearish regarding the long-term earnings of the company.
Magnitude of Estimate Revisions
Earnings estimates for fiscal 2011 have decreased by a penny in the last 7 days to $3.11. For full year 2011, Ventas expects recurring FFO in the range of $3.06 – $3.14 per share. For fiscal 2012, earnings estimates have decreased by 2 cents to $3.32 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 Ventas is neutral. Ventas is one of the top performing healthcare REITs in the U.S., with one of the largest and most diversified portfolios in the healthcare sector with exposure to all types of facilities.
The product diversity of the company allows it to capitalize on opportunities in different markets based on individual market dynamics, and provides a hard-to-replicate competitive advantage over its peers.
Healthcare is also relatively immune to the economic problems faced by office, retail and apartment companies. Consumers will continue to spend on healthcare while cutting out discretionary purchases. The healthcare industry is the single largest industry in the U.S., based on Gross Domestic Product (NYSE:GDP), and offers stability to the company in a volatile market.
However, one of the biggest risks to healthcare focused REITs is government reimbursement rates, which are proposed 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 Ventas, 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 on Nationwide Health Properties Inc. (NYSE:NHP), one of the competitors of Ventas.