Health Care REIT Inc. (HCN), a leading healthcare real estate investment trust (REIT) that operates senior housing and health care real estate, reported fiscal 2011 first quarter recurring funds from operations (FFO) of 70 cents per share, which beat the Zacks Consensus Estimate by a penny. Fund from operations, a widely used metric to gauge the performance of REIT, 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 $255.5 million compared to $145.4 million in the year-earlier quarter. Total revenues for the reported quarter were well ahead of the Zacks Consensus Estimate of $234 million.
During the quarter, Health Care REIT made gross new investments of $1.4 billion, bringing the year-to-date tally to $3.9 billion. The company increased 2011 net investment guidance by $2.5 billion to $3.7 billion.
(Read our full coverage on this earnings report: Health Care REIT Beats Slightly)
Earnings Estimate Revisions- Overview
Fiscal 2011 earnings estimates have moved in both directions for Health Care REIT since the earnings release, meaning that analysts are cautious about the current fiscal performance of the company. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
In the last 30 days, fiscal 2011 earnings estimates were raised by 3 analysts out of 11 covering the stock, while 3 had lowered the same. For fiscal 2012, 4 out of 16 analysts covering the stock have revised their estimates upward, while 8 have lowered it during the same time period. This indicates that the analysts are circumspect about the short-term fiscal year earnings, although on a long-term basis, fiscal earnings are skewed in the negative direction.
Magnitude of Estimate Revisions
Earnings estimates for fiscal 2011 have remained static in the last 30 days at $3.39. For full year 2011, Health Care REIT expects FFO in the range of $3.32 – $3.42 per share. For fiscal 2012, earnings estimates have dipped by a penny during the last 30 days to $3.82, which signifies that although the market fundamentals are gradually improving, they are yet to reach their optimum range to gain sufficient investor confidence.
Moving Forward
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 source of revenue despite a challenging macroeconomic environment. In addition, the healthcare sector is one of the more recession-proof real estate sectors and has continually fared relatively better than other sectors during the commercial real estate downturn.
Furthermore, 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 maintain our long-term ‘Neutral’ recommendation and a Zacks #3 Rank for HCP, Inc. (HCP), one of the competitors of Health Care REIT.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
HEALTH CR REIT (HCN): Free Stock Analysis Report
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