Omega Healthcare Investors: Sitting On The Sidelines For Now

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

Omega Healthcare Investors benefits from an aging U.S. population and a wave of retiring boomers.

The healthcare REIT covers its payout with AFFO, and has room to hike its dividend in 2019.

2019 could see more strategic acquisitions.

I wait with a purchase until the stock market bottoms out.

An investment in OHI yields 7.1 percent.

Omega Healthcare Investors, Inc. (OHI) is off to a good start in 2019. The healthcare real estate investment trust acquired MedEquities Realty Trust, Inc. in the first quarter which will help the company grow its funds from operations going forward. Further, Omega Healthcare Investors could hike its dividend in 2019 and/or announce more acquisitions in order to grow its core business again after a series of operator problems that plagued the healthcare REIT in 2017/8. An investment in OHI yields 7.1 percent, but I will continue to wait on the sidelines until the stock market bottoms out.

Omega Healthcare Investors - A Long-Term Play On An Aging U.S Population

Omega Healthcare Investors is the largest skilled nursing facility REIT in the United States and has an equity value of $7.6 billion. The healthcare REIT owns a large portfolio of skilled nursing, transitional care and senior housing facilities that cater to the needs of older age cohorts. At the end of the March quarter, Omega Healthcare Investors' real estate portfolio consisted of 910 properties valued at $8.5 billion.

Source: Omega Healthcare Investors Q1-2019 Earnings Supplement

Omega Healthcare Investors benefits from long-term demographic changes in the United States. As people live longer lives than ever, the demand for skilled nursing facilities and services will only go up over the next couple of decades. Retiring baby boomers represent a significant growth opportunity for large SNF-REITs such as Omega Healthcare Investors.

Source: Omega Healthcare Investors

The skilled nursing market remains largely fragmented, and Omega Healthcare Investors itself estimates that it only owns about 5 percent of the growing SNF-market. As a result, Omega Healthcare Investors is faced with a huge market opportunity that can set the base for long-term FFO growth.

Source: Omega Healthcare Investors

Focus On Acquisitions

2018 was a reset year for Omega Healthcare Investors as the company struggled with some of its operators, especially Orianna Health Systems. Omega Healthcare Investors has transitioned facilities from struggling operators to more healthy operators throughout 2018, and the majority of the REIT's operator problems are now resolved. Nonetheless, Omega Healthcare Investors recognized a $7.7 million impairment on its direct financing lease related to the sale of 15 Orianna facilities in the first quarter.

That said, though, 2019 is looking to be a good year for Omega Healthcare Investors: The company acquired MedEquities Realty Trust in Q1-2019, a transaction that diversified the REIT's operator base (and reduces cash flow risks) and that was said to be accretive to earnings and cash flow. Omega Healthcare Investors could announce more strategic acquisitions in 2019 as the company seeks to scale its business and rebound from its asset repositioning program. Omega Healthcare Investors has historically been an aggressive acquirer that regularly spent hundreds of millions of dollars a year on new property acquisitions as a way to grow FFO.

Source: Omega Healthcare Investors

The Dividend Is Safe

Omega Healthcare Investors froze its quarterly dividend payout @$0.66/share last year when the company repositioned its asset portfolio on the back of operator problems. That being said, though, I think Omega Healthcare Investors could raise its dividend payout in 2019 due to strong dividend coverage.

Omega Healthcare Investors earned an average of $0.81/share quarterly in AFFO compared to an average quarterly dividend payout of $0.64/share in the last twelve quarters. The implied AFFO-payout ratio is just 79 percent.

Source: Achilles Research

Valuation

My "Buy" range for Omega Healthcare Investors is $30-$32 which implies a 9.9x-10.5x Q1-2019 run-rate AFFO-multiple. Since the healthcare REIT's shares today sell for $37.24, income investors pay ~12.3x Q1-2019 annualized AFFO which implies an unfavorable risk/reward ratio, in my opinion, especially in light of increasing uncertainty about a U.S.-China trade deal that weighs on investor sentiment. Downward pressure on stocks is building so I think there is actually a pretty good chance for investors to be able to scoop up OHI in the low $30s.

Risk Factors Investors Need To Consider

Risk factors regarding Omega Healthcare Investors include:

  • Intensifying competition in the SNF-industry which would put downward pressure on occupancy rates and cash flow;
  • Troubled operators that fail to make lease payments on time;
  • Deteriorating dividend coverage;
  • Increasing market volatility with respect to the U.S.-China trade conflict.

Your Takeaway

Omega Healthcare Investors is a long-term bet on an aging U.S. population. The company is the largest healthcare REIT in the still fragmented SNF-industry. Omega Healthcare Investors has historically been an aggressive buyer of healthcare facilities and the company could announce more strategic acquisitions in 2019 as a way to grow FFO.

Omega Healthcare Investors' dividend is covered with AFFO, and has potential to grow again in 2019, as long as the company doesn't have to deal with more operator problems. Since I expect more market volatility and selling pressure related to the trade war, I am going to remain on the sidelines for now, but am planning on re-buying OHI in the low $30s price range.

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.