Omega Healthcare Investors' Long-Term Prospects Make Anytime The Right Time To Buy

| About: Omega Healthcare (OHI)


OHI pays a 6.5% annual dividend.

OHI reported AFFO of $0.81 per common share in Q4 2015. It reported FAD of $0.72 per share.

Shockingly the FFO was only $0.65 per share ($127.4 million); but OHI had a $23.3 million adjustment for early extinguishment of debt and $5.4 million related to the AVIV acquisition.

Omega Healthcare Investors Inc. (NYSE:OHI) is a U.S. REIT. It invests in long-term healthcare facilities. As of September 30, 2015, the REIT owned or held mortgages on over 932 skilled nursing facilities, transitional care facilities, and senior housing facilities, with over 90,000 available beds located in 42 states (plus the U.K.) and operated by 83 third-party healthcare operating companies. These are well diversified both by state and by management company. As of Q4E 2015, no operator exceeded 6.9% and no state exceeded 11.0% of OHI's rent/interest.

OHI has been a great long-term performer. The chart below shows the 13-year performance of its stock.

When you couple this kind of long-term stock price appreciation with a currently 6.5% annual dividend, you have a stock that may give you total annual returns of 20%+ over the long term. Admittedly the growth rate could slow down in the future as OHI has increased in size over time to a company with an Enterprise Value of $10.19B. It does become harder to make larger and larger acquisitions. Still even if you figure a CAGR of only 5% for the share price going forward, OHI should still yield a total return (dividend and stock price appreciation) of 10%+ per year over the long term (and that could easily be 20%+ per year). The fantastic demographics of OHI's industry should mean that growth should be sustainable, if not fantastic. Further OHI's extra size, although a hindrance to fast growth, may mean that the company will be that much more stable in tough economic times, which may be exactly what are approaching. OHI's Beta is 0.45.

The chart below shows the estimated growth in the population of those in the US over 85 years of age. Essentially the retirement of the Baby Boom generation should lead to continued growth in the older segments of the US population for many years into the future. It is that demographic that makes high use of skilled nursing facilities (OHI's main business).

The chart below shows where Medicare hospital discharges go for further recuperation and treatment.

For those who don't know the acronyms, I have provided the definitions below:

  • SNF -- Skilled Nursing Facility.
  • HHA -- Home Health Aide.
  • IRF -- Inpatient Rehabilitation Facility.
  • LTACH -- Long Term Acute Care Hospital.

I am unsure about the costs of HHAs versus SNFs; but SNFs are far cheaper than IRFs and LTACHs. That means that SNFs will get a lot of the extra business from the aging US population in the future. Medicare and Medicaid will have to use the cheapest solution available.

We have not even reached the midpoint of the Baby Boom generation retirement curve. That will be about five years from now; and even those Baby Boomers will remain relatively healthy for another 10 years after that. Yet as you can see from the chart below, the volume of Medicare funded SNF days per year has been rising rapidly.

In the above chart, the "Aggressive" purple line refers to how aggressively the various insurers try to get people out of SNFs in the shortest amount of time.

Some investors will worry that Medicare and/or Medicaid compensation from the government will diminish or fail to rise fast enough. The chart below shows that there is little to worry about if past history is a good indicator.

Perhaps as important to the overall picture is the rent coverage in itself and as it compares to OHI's peers (see charts below).

OHI seems to be at the high end of the scale in both EBITDARM and EBITDAR. Investors have to be happy that they would be selecting a top competitor in the space, if they select OHI to invest in. They also have to be happy that OHI's metrics should mean that it should be able to navigate any US economic downturn such as a recession with little trouble. Investors have to be happy that OHI announced its 14th consecutive quarterly dividend increase on January 14, 2016 to $0.57 per common share (or $2.28 per year) -- 6.5% per year.

For those investors worried about a downturn, it should be comforting to know that OHI will have a minimal amount of near-term debt expirations (see chart below).

OHI had a Debt to EBITDA ratio of 4.4x as of Q4E 2015. It had a revolving credit line of $1.25B. Of this $1.2B was still available as of February 1, 2016. It had a debt to total asset value of 41.0% as of Q4E 2015. It had an AFFO payout ratio of 71% and an AFAD payout ratio of 79%. Its credit has the lowest investment grade credit rating at BBB- from S&P and Fitch and Baa3 from Moody's. However, these ratings are still "investment grade."

The chart below shows that OHI's leverage has remained relatively steady over the last five years. During the same period, its Cash Fixed Charge Coverage has increased. This is a positive trend for OHI.

Most recently OHI had a good Q4 2015. Its FAD were $0.72 per common share. Its AFFO was $0.81 per common share, although its FFO was only $0.65 per common share. At first this may seem like too big a gap between AFFO and FFO. However, OHI's reasons seem legitimate. OHI took a $23.3 million charge for early extinguishment of debt, so that it could replace certain debt with less expensive debt. It had a $7.6 million provision for uncollectible mortgages, notes, and straight line receivables. It had a $5.4 million lease revenue catch up charge related to its acquisition of AVIV leases. It had $4.5 million in non-cash stock-based compensation expense. It had a $2.0 million charge due to costs associated with the AVIV merger. By definition these "adjustments" are one time charges. However, that rule seems stretched to the breaking point by some companies. In this case the AVIV related charges and the early extinguishment of debt charges seem easily believable as one time charges. In other words, $23.3 million, $5.4 million, and $2.0 million for a subtotal of $30.7 million of the total $42.8 million in adjustments seem well justified as one time adjustments. Knowing this seems to bring the AFFO and the FFO into much better alignment.

2016 AFFO and FAD Guidance:

  • OHI expects FY2016 AFFO of $3.25 to $3.30 per share
  • OHI expects FY2016 FAD of $2.95 to $3.00 per share

OHI's guidance above includes plans for about $650 million in new investments during the year. This includes the $186 million in new investments ($170 million of it for the acquisition of 10 SNFs) already made as of February 10, 2016. AFFO for FY2015 was $3.13 per common share. Using the midpoint of guidance for FY2016 of AFFO of 3.275 per common share, OHI will grow AFFO by only +4.6%. This doesn't sound like much; but OHI has a history of beating its early estimates. Hence AFFO growth at the end of 2016 seems likely to be in the 5% to 7% range. I think this can be considered good for what may likely be a troubled year.

The Price/AFFO ratio using the midpoint of OHI's FY2016 guidance is only about 10.8. This makes OHI a relative bargain at this time. Some may see a recession coming, and one may come. However, OHI's has a low Price/AFFO ratio. It has a long history of performing well (and paying its dividend consistently). It is a good income producer where investors can likely ride out a recession. If there is no recession, that is all to the better. Then its Price/AFFO ratio is a much better bargain. OHI is a buy.

The 10-year chart of OHI provides some technical direction for a trade/investment.

OHI clearly has had a very long uptrend. It is still in that uptrend; but the stock price is historically close to its 50-period SMA on the 10-year chart. This is another indication that OHI can be bought at this time. Yes, the bottom may drop out of the market in a recession. However, if you are a committed long-term investor, you should still be able to invest in this great long-term performer now. It will provide you with steady income. Even if the stock price retreats in a recession, it should still recover quickly due in part to the great fundamentals provided by the retiring of the Baby Boom Generation in the US. Nothing is guaranteed in the stock market; but OHI is one of the most likely winners over the long term. It should allow you to sleep well at night. OHI is a buy.

NOTE: Some of the fundamental fiscal information above is from Yahoo Finance.

Good Luck Trading/Investing.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in OHI over the next 72 hours.

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.

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