Purchase Omega Healthcare Investors: Perfected Value

| About: Omega Healthcare (OHI)

Summary

Omega Healthcare Investors Inc is a healthcare facilities based REIT.

Recently, the price has continued to climb higher and higher which calls to question if it has become overvalued.

Based on the metrics, the REIT is still very much a great value and can yield a solid 6%+ yield.

Recently I reviewed both STAG Industrial Inc. (NYSE:STAG) and American Tower Corp (NYSE:AMT) REITs while in search of my next stock pick. Keeping with my trend this week of reviewing different REITs, I want to move on to another that I have been digging into. I refer of course to Omega Healthcare Investors, Inc (NYSE:OHI).

Omega Healthcare Investors Inc is by trade a self-administered REIT that primarily invests in healthcare facilities - both skilled nursing facilities (SNFs) and assisted living facilities (ALFs). As of end of December 2015, the REIT's portfolio consisted of 949 healthcare facilities located in 42 different states and the United Kingdom. These facilities are operated by 83 third-party operators. The primary assets in the portfolio are SNFs (782 of them) and there are minor holdings in relation to ALFs (only 85 of them).

Currently, Omega Healthcare Investors Inc. trades at a price of $35/share which is at a small discount off of their 52-week moving average of $26.96-38.75. The stock also pays a dividend. At the present time, they pay an annual dividend of $2.28 which breaks down to 6.37%. With a price that is barely off from the 52-week high, I am a little concerned whether or not this is a good price to buy in at but with a dividend as attractive as 6.37% and their upcoming payment which confirmed they are raising it again, I can easily move past that.

If we move on to the most important item for REITs, the funds from operations, we see that the stock is still very much moving forward. The FFO in 2011 was 172. In 2012 it was raised to 222. Again in 2013, it was raised to an even more impressive 303 and then again in 2014 to 345. Finally, in 2015, the FFO reported was an impressive 455 (expressed in millions). This is exactly what I want to see from an REIT that I am looking to invest in. It consistently shows more and more profitability coming from the business model which is solid to say the least. FFO, however, is useless when attempting to see whether the future will hold profitability in the same way, if they don't have optimistic prospects. This is where I have some worries. The business itself is very heavily weighted towards payments that are reimbursed by Medicaid and Medicare. Numerous states are focusing on reduction of expenditures under these programs and that could affect reimbursement rates for the businesses. If enough issues with Medicare and Medicaid pile up and slow down or prevent payments from those who use the facilities that the REIT operates, this could potentially cause locations under the REIT's umbrella to have issues meeting their leases. These issues are of course only a guess as to what could come as the future is often times unpredictable.

With that being said, is the price of Omega Healthcare Investors Inc fair in relation to their net asset value? If we calculate it out we get a NAV of 31.65. As a reminder, the current share price is $35/share. The numbers are very close! This would appear to suggest that the share price is very close to being perfectly priced. I would feel more than comfortable with the price if I were buying today. As for the debt-to-equity ratio, we arrive at a total debt-to-equity ratio of 1.15 which is also very fair, given the amount of debt that a lot of REITs can typically find when trying to fund new acquisitions.

Next I want to move over to the analysts and what they have to say. As of March 7th, 2016, Research Team rated the stock as hold. Jaywalk then followed up on that hold on April 16th, 2016. These both correlate with The Street Rating's hold move that was placed on February 12th, 2016. It would appear that the analysts feel that the stock may be a little overvalued and therefore would be best held at a standstill. I would argue however that the stock is trading at a relatively fair value. If it were to raise a few more dollars per share, I may change my mind but as long as it were to stay somewhere underneath the $40/share price point, I feel that it is a great buy. My reasoning revolves around the futures that are in plain view.

It is as Benjamin Franklin said; nothing can be said to be certain except death and taxes. Before someone can reach death, they may typically find themselves in an assisted living facility or in and out of the hospital, but stopping at a skilled nursing facility before heading home. This is the business that Omega Healthcare Investors, Inc runs off of. That business in relation is a good business to be in if I am asked my opinion on it as one can hardly avoid it. It is a necessary business and therefore cannot be withheld even if people are having a hard time finding a few extra dollars. It is best to deal in these types of necessities rather than commodities.

In conclusion, I would have to say that Omega Healthcare Investors Inc is a great deal where it is currently priced. Although some may argue that it should be held while it is a little above where it should be fairly trading at, I would argue that the price is well within the bounds of a safe price. Based on the fair value in relation to the NAV, the low debt-to-equity ratio and the extremely fair dividend yield, I would rule it to be a great buy in today's market as long as one feels those benefits outweigh the minor risk of changes in Medicare and Medicaid.

Disclosure: I am/we are long STAG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.