Earnings Scorecard: Health Care REIT - Analyst Blog

Health Care REIT Inc. (HCN), a real estate investment trust (REIT) that operates senior housing and health care real estate, reported fiscal 2010 second quarter recurring funds from operations (FFO) of 80 cents per share, which marginally exceeded the Zacks Consensus Estimate by a penny. Funds 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.

Below we cover 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

During the quarter, Health Care REIT invested $292.9 million compared with $177.7 million in the year-earlier quarter. The company sold assets worth $14.6 million, resulting in net new investments of $278.3 million during the quarter, compared with $78.7 million of asset sales in the year-ago quarter generating net new investments of $98.9 million.

For the first six months of the current fiscal year, Health Care REIT completed gross investments valued at $877.6 million, partially offset by $47.5 million of asset sales and loan payoffs resulting in $830.1 million of net new investments. This has increased significantly from gross investments of $351.4 million during the first half of fiscal 2009, partially offset by $123.0 million of property sales and loan payoffs, which resulted in $228.4 million of net new investments.

(Read our full coverage on this earnings report: Health Care REIT Marginally Beats)

Earnings Estimate Revisions- Overview

Fiscal earnings estimates have climbed for Health Care REIT since the earnings release, meaning that analysts are upbeat about the long-term performance of the company. Lets dig into the earnings estimates in detail.

Agreement of Estimate Revisions

In the last 7 days, fiscal 2010 earnings estimates were raised by 4 analysts out of 13 covering the stock, while none lowered. For fiscal 2011, four out of 14 analysts covering the stock revised their estimates upward, while only 1 lowered it. This indicates a clear positive direction for fiscal year earnings. Management further observed that the steady improvement in operating trends across the portfolio was largely due to stabilization in the market fundamentals.

Magnitude of Estimate Revisions

Earnings estimates for fiscal 2010 have increased by a penny in the last 7 days to $3.18. Following the second quarter results, Health Care REIT has also revised its recurring FFO guidance for full year 2010 from the range of $3.10 - $3.20 per share to $3.13 - $3.20. For fiscal 2011 however, earnings estimates have remained steady at $3.36, which indicates that while fundamentals had shifted decidedly in favor of healthcare facilities, they were still impacted by challenging broader economic trends.

Moving Forward

The long-term earnings estimate picture for Health Care REIT is positive. The healthcare sector is 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, the 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, Health Care REIT operates in a cutthroat market and competes with national and local healthcare operators on a number of factors, including quality, price, and range of services provided; reputation; location; and demographics of the population in the surrounding area; and the financial condition of its tenants and operators. Consequently, the company is under severe stress to maintain profitability.

Currently, we maintain our long-term Neutral rating on Health Care REIT with a Zacks #3 Rank, which translates into a short-term 'Hold' recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1-3 months.

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/