Omega Healthcare Investors (OHI) is a real estate investment trust that invests in the long-term healthcare industry. Its focus is on skilled nursing and assisted living facilities, and its portfolio is primarily triple-net leases operated by healthcare providers, notes Ben Reynolds, editor of Sure Dividend's Top 10 REITs.
Omega has most of its properties in the United States but has a small presence in the United Kingdom as well. Omega was founded in 1992, produces about $945 million in annual revenue, and trades with a market capitalization of $6.8 billion.
Omega reported third-quarter earnings on November 3rd, 2021 and results were slightly better than expected. Funds from operations (FFO) per share was 73 cents, besting estimates by three cents. Revenue was up to $282 million, a massive improvement over the prior year’s net loss of ($93.8) million.
While results are promising amid multiple tenants facing issues with paying rent, $16 million of revenue was composed of security deposits, letters of credit and collateral to Agemo and Gulf Coast’s contractual obligations, but this is only a short-term temporary solution with limited collateral.
Operators accounting for roughly 12.5% of third quarter contractual rent and mortgage payments have stopped paying rent in 2021. Given many operators are still struggling with the impact of COVID, there is an elevated risk that other tenants may be unable to pay rent. This will put pressure on our estimation of $3.30 in FFO per share in 2021.
Safety & Dividend Risk Analysis
Healthcare in general is much less cyclical during tough economic times than most sectors, simply because the vast majority of healthcare providers are non-discretionary, meaning customers need the service irrespective of economic conditions.
Given that Omega is primarily exposed to skilled nursing and assisted living facilities, it performed quite well during the Great Recession, and we expect that to be the case during the next recession as well. Currently, there are risks given that certain operators are facing increased costs and reduced financial support from local and federal governments.
The trust’s debt-to-equity ratio is elevated at 131% today, and the current run rate for interest expense is about $224 million annually. Those are significant numbers, which is why Omega opts to issue new common shares to raise capital. The payout ratio remains around 81% of FFO, though with expected rent issues this is likely to climb.
Growth, Value & Expected Total Return Analysis
We see Omega’s growth at just 2% annually, which is well below its historical average of more than 5%. We like its exposure to the growing population of people that need assisted living, but tenant solvency issues and expensive financing have kept a lid on growth of late, and we believe this may persist.
Even so, the stock is quite cheap today at just 8.6 times FFO estimates for this year, well short of our estimate of fair value at 12 times FFO. That implies a 7.1% tailwind to total annual returns from the valuation, and combined with 2% growth and the 9.4% yield, we see a very enticing 15.4% total annual return forecast for Omega in the coming years.