Omega Healthcare Investors: Returning To Growth In 2019, But Should You Buy?

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About: Omega Healthcare Investors, Inc (OHI)
by: Achilles Research
Summary

Omega Healthcare Investors reported Q4-2018 results yesterday.

The healthcare REIT missed FFO estimates.

Dividend coverage was good in the last quarter, and the REIT guided for year-over-year A/FFO growth.

That being said, though, shares continue to be overvalued, in my opinion.

An investment in OHI yields 6.7 percent.

Omega Healthcare Investors (NYSE:OHI) does not make a compelling value proposition at today's price point based on valuation and risk/reward. Though Omega Healthcare Investors once again covered its dividend payout with adjusted funds from operations in the last quarter and guided for A/FFO growth this year on the back of acquisitions, the healthcare REIT is currently slightly overvalued based on AFFO. An investment in Omega Healthcare Investors at today's price point yields 6.7 percent.

Earnings Snapshot

Healthcare REIT Omega Healthcare Investors released results for its fourth quarter on Monday that failed to meet analysts' consensus expectations. The healthcare real estate investment trust reported $0.73/share in adjusted funds from operations - a widely used figure in the REIT industry - which compared to adjusted funds from operations of $0.79/share a year ago. Analysts were expecting the REIT to report AFFO of $0.76/share.

Despite the earnings miss, though, Omega Healthcare Investors continued to cover its quarterly dividend payout of $0.66/share rather easily with adjusted funds from operations. Hence, the dividend is not at risk over the short haul, in my opinion.

Here are Omega Healthcare Investors' distribution coverage stats, updated for the fourth quarter.

Source: Achilles Research

Why I Closed My Position In OHI At The End Of Last Year

If you recall, I closed my long position in Omega Healthcare Investors in December 2018 as I was increasingly concerned about the rate of price appreciation, the REIT's valuation, and overly bullish investor sentiment with respect to the healthcare REIT. I have discussed my decision to sell OHI in my article "Omega Healthcare Investors: Why I Sold Everything". My stance on Omega Healthcare Investors has not changed in light of the REIT's Q4-2018 earnings release.

Omega Healthcare Investors' shares have not yet dropped back to the low $30s (as expected), at which point I would consider re-buying the healthcare REIT for my high-yield portfolio. Though shares are no longer overbought, they are likely overvalued (I discuss Omega's valuation further below in this article).

Source: StockCharts

Optimistic Outlook

Omega Healthcare Investors is cautiously optimistic about 2019 and has guided for year-over-year funds from operations growth on the back of acquisitions [emphasis mine]:

We look forward to 2019. With our asset repositioning and portfolio restructurings complete, we expect significantly lower general and administrative costs and look forward to completing the MedEquities acquisition. While the labor market remains challenging for our operators, we believe the Patient Driven Payment Model, starting in October, represents a sensible reimbursement model that should improve both patient outcomes and operator profitability. Further, we believe 2019 should see a return to the historical acquisition profile of the Company, which should drive growth in FFO as the year progresses.

In case you missed it, Omega Healthcare Investors - after a difficult year of repositioning its facility portfolio and freezing its dividend - is growing again.

Earlier this year, the company announced the acquisition of MedEquities Realty Trust, which is set to boost Omega Healthcare Investors' A/FFO by $0.05/share going forward. Besides being accretive to cash flow, the transaction is expected to increase Omega's operator diversification (less cash flow risks), which income investors will appreciate. Here are a couple of other benefits of the most recent transaction:

Source: Omega Healthcare Investors Press Release

Omega Healthcare Investors' guidance for year-over-year A/FFO growth in 2019 is a big deal for the healthcare REIT not only because the company worked through some major operator issues in 2017/8 but also because the REIT's AFFO dropped from $3.30/share in 2017 to $3.04/share in 2018, reflecting a decrease of ~7.8 percent. A return to growth is a promising development and could indeed foreshadow a dividend hike in 2019.

Valuation

While I think that Omega Healthcare Investors faces attractive growth prospects, long term, and has resolved its operator problems, the healthcare REIT is likely a bit overvalued at today's price point. I have previously pegged OHI's fair value at $33-36/share, but I am increasing my FV estimate by $1.00/share due to the fact that the REIT's A/FFO is expected to grow again this year. The updated estimated fair value range for OHI is, therefore, $34-37/share (reflecting an 11-12x 2019e AFFO multiple). Since shares currently change hands for $39.26 (above estimated fair value range), I am not a buyer today.

Your Takeaway

Omega Healthcare Investors is expected to be growing again in 2019 based on A/FFO, which is a big deal after the company froze its dividend last year on the back of operator problems and declining cash flow. Omega Healthcare Investors also continued to cover its dividend payout with AFFO in the last quarter, and the healthcare REIT could potentially start to grow its dividend again this year. However, shares are fully priced (and probably slightly overpriced), in my opinion, which implies an unfavorable risk/reward. I am prepared to re-buy OHI for my high-yield portfolio in the low $30s.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.