REIT Omega Healthcare Investors: A Value Play In Healthcare

| About: Omega Healthcare (OHI)

Omega Healthcare Investors, Inc (NYSE:OHI) is a REIT which owns or holds mortgages on a variety of healthcare facilities, especially in the skilled nursery industry.

At December 31, 2011, Omega Healthcare owned or held mortgages on 432 skilled nursing facilities, assisted living facilities and other specialty hospitals with approximately 50,160 licensed beds located in 35 states and operated by 51 third-party healthcare operating companies. Omega Healthcare keeps searching the market for opportunities and invests in them as they come its way.

Over the past few years Omega Healthcare maintained a relatively stable (with very slow growth) occupancy rate of around 84%. All of Omega Healthcare's assets are triple net leases, meaning that each tenant pays all operating costs, taxes, insurance and maintenance costs in addition to the rent.

On a regular basis, Omega Healthcare invests in improving and renovating its assets by adding new therapy wings, placing new roofs etc. That results in improving the assets' marketability and market position and improves the ability of the assets operator to pay future rent to the company.

Some numbers about Omega Healthcare (according to FY 2011 results):

  • Portfolio's gross investment value: Over $2.5 billion, of which about $170 million were invested during 2011.

  • Total debt: Just under $1.6 billion

  • Fund from operations (FFO): $172 million

  • FFO per share during 2011: $1.69

  • FFO per share during 4th quarter of 2011: $0.45

  • Current Price to FFO (using 4th quarter results) ratio: 11.45

  • Adjusted FFO average annual growth since 2003: 13%

  • EBITDA / Interest Expense: 3.16

  • As of December 31st 2011, Omega Healthcare used approximately 57% of its credit lines.

  • No material debt is scheduled for repayment until 2016.

  • No material contract renewals are expected during the next few years (about 35% until 2017).

  • Current dividend yield: 8%, dividends have been constantly increased since 2003.

  • Forecasted 2012 FFO: $2.06 - $2.12 per share (16% growth compared to 4th quarter results).

  • During the last 2 years there was one insider stock purchase at $21.23 and several sales at $23 - $25 per share.

Recent activities:

Since December 31 2010, Omega Healthcare has sold shares to the public to increase its equity base, improved its credit lines and lowered interest on its debt, announced a $100 million stock repurchase program and continued to take advantage of the market situation in buying more assets to its portfolio. The purchased assets imply a high cap rate, meaning that management is setting the way to higher growth & income in the future.

Comparison to other REITs:

Omega Healthcare Investors, Inc

Senior Housing Properties Trust (NYSE:SNH)


Healthcare Realty Trust (NYSE:HR)

Realty Income Corporation (NYSE:O)

Market Cap

$2.14 B

$3.48 B

$15.98 B

$1.61 B

$4.93 B

Gross portfolio investment

$2.54 B

$4.72 B

$17.59 B

$2.79 B

$4.98 B

Total Debt

$1.55 B

$1.83 B

$7.72 B

$1.39 B

$2.05 B

EBITDA / Interest expenses






Dividend Yield






FFO per Share (4 times 4th quarter 2011)






Price / above calculated FFO






The pros and cons of Omega Healthcare:

  • I will start with the biggest risk Omega Healthcare faces: Regulation. The recent and predicted changes under the healthcare reform might cause further reductions to the reimbursements received by Omega Healthcare's assets operators from Medicare and Medicaid. Such reductions might adversely affect the operator's ability to continue regular payments to Omega Healthcare and therefore affect their cash flows, profitability and future dividends. However, given the expected growth of senior population and lack of alternatives - I believe a way will have to be found to keep the industry up and running.

  • Omega Healthcare is active in one of my favorite industries - healthcare for senior population. As the senior population in the USA grows quickly and supply of skilled nursing facilities remains limited, the industry will have to grow in the future.

  • Omega Healthcare has a strong balance sheet as well as strong liquidity and unused credit lines. That makes it is well positioned to take advantage of buying opportunities that come its way.

  • On a regular basis Omega Healthcare helps its assets operators by investing in assets improvements. That helps them in marketing the assets and improving the operators' ability to keep paying rent as scheduled.

  • Occupancy rate of approximately 84% over the past few years. That figure is somewhat low, look at Senior Housing, that sports close to 90% occupancy rate.

  • Along the past few years Omega Healthcare made it to increase its FFO and dividends impressively. I believe this trend will continue as recent assets were purchased at high cap rates (unless the healthcare reform will provide unpleasant surprises).

  • Omega Healthcare has no material upcoming debt repayments or lease expirations during the next few years.

  • Decent geographic and operator diversification.

  • You get paid a relatively safe 8% dividend yield.


Investing in Omega Healthcare has one major risk - the effects of the healthcare reform on the industry. If you think this risk is too big for your taste, you can check Senior Housing as an alternative in the same industry, where 94% of the NOI comes from private paying properties. However, if you feel as I do - that there is real national necessity for that industry to exist and grow - I think looking at how well Omega Healthcare is positioned for future growth, you might make some room for it in your portfolio.

Disclosure: I am long OHI.

Additional disclosure: I may initiate long position in SNH within the next 72 hours.