Ventas Inc. (VTR), a leading health care real estate investment trust (REIT), reported fiscal 2010 second quarter recurring fund from operations (FFO) of 71 cents per share, which exceeded 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, 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 quarter were $244.0 million compared with $231.5 million in the year-earlier quarter. Revenues during the reported quarter marginally beat the Zacks Consensus Estimate of $243.0 million.
Net operating income (NOI) from all 79 properties was $38.8 million during the quarter, compared with $33.9 million in the year-ago period. The year-over-year increase was primarily due to a 3.5% rise in average daily rate and a 190 bps increase in occupancy.
Read our full coverage on this earnings report: Ventas Tops Estimates
Earnings Estimate Revisions: Overview
Fiscal earnings estimates have climbed for Ventas since the earnings release, meaning that analysts were bullish about the long-term performance of the company. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
In the last 30 days, fiscal 2010 earnings estimates were raised by 11 analysts out of 13 covering the stock, while none have lowered the same. For fiscal 2011, 8 out of 14 analysts covering the stock have revised their estimates upward, while 2 have lowered the same. This indicates a positive directional movement for the fiscal year earnings. Management further observed a steady improvement in the operating trends across the portfolio with an increasing demand for healthcare facilities.
Magnitude of Estimate Revisions
Earnings estimates for fiscal 2010 have increased 4 cents from $2.76 to $2.80 since the earnings announcement. For fiscal 2011, earnings estimates have increased 1 penny to $2.95. This is encouraging news for the company. For full year 2010, Ventas has also increased its recurring FFO guidance in the range of $2.75–$2.80 per share from $2.69–$2.75.
The long-term earnings estimate picture for Ventas is positive. Ventas is one of the top performing health care REITs in the U.S., with one of the largest and most diversified portfolios in the sector with exposure to all types of health care 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.
However, a large portion of Ventas’ revenue originates from a few tenants, exposing it to operator risk. If one of the company’s larger tenants runs into financial difficulty, earnings could be negatively affected.
Currently, we maintain our Neutral rating on Ventas 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.