Omega Health Care Investors (NYSE:OHI) is a real estate investment firm that invests primarily in the real estate of long-term care and skilled nursing facilities, as well as assisted living homes. Omega invests by providing capital and financing to these health facilities. As of September 30th, 2013 Omega owned 477 skilled nursing facilities in 33 states.
Currently the Baby Boomer generation (the approximately 77 million people born between 1946 and 1964) makes up about 35% of the U.S. population. This generation started reaching the age of 65 in 2011 and the population of those 65+ years old is growing at a 15% annual rate compared to the general population growth of about 9% a year.
What does this mean for investors? With such a large percentage of our population entering retirement, this means that the demand for skilled nursing facilities and assisted living homes is poised to increase at a highly correlated rate to the amount of the U.S. population entering retirement over the next 15-20 years.
One avenue to profit off this population trend is through Omega Health Care. Omega's fundamental strengths can been seen in many different areas. Omega has experienced steady dividend growth nearly every quarter since 2004, with the exception of the financial crisis in 2008 and 2009 where OHI held their dividend payment constant. In the last 5 years OHI's yield has increased by an average of 10.31% year over year. The company is currently yielding about 6.30% per year after a recent dividend increase to .49 cents per share.
When comparing Omega's trailing 12 month P/E ratio to the REIT industry, Omega is trading at 22.9x their earnings or a 23.5% discount to their competitors trading at 28.3X their earnings. With Omega's 5 year average P/E ratio at 33.2, I again see a large discount on Omega's current trading price
Using a DDM to value Omega with a 10% required return, Omega is valued at slightly over $50.00 per share or a 58% increase from today's trading price.
All in all, no valuation method is full-proof and taking all factors into consideration I see upside of 20-40% in Omega Healthcare in 2014.
I view Omega Health Care Investors a BUY for the long-term, however in the short term the company may experience some volatility due to the volatile interest rate environment.