A leading investor in skilled nursing facilities, Omega Healthcare Investors (OHI) continued its post-pandemic recovery streak, as evidenced by its robust second quarter results in early August, notes Todd Shaver, editor of Bull Market.
The company posted $245 million in revenues, down 5% YoY, compared to $257 million a year ago, and a profit of $92 million, or $0.38 per share, as against $87 million, or $0.36. Adjusted Funds From Operations for the quarter was $185 million or $0.76, compared to $207 million, or $0.85.
The company posted a handy beat on top and bottom lines, and the YoY decline in revenues was primarily owing to the sale of facilities over the past 12 months — they sold 13 facilities for $54 million in cash proceeds, generating a $25 million gain.
Occupancy rates across its facilities stood at 77.7%, an improvement from 75.8% at the end of 2021, providing much-needed respite for its operators, who were faced with tough operating conditions over the course of the pandemic.
Omega is primarily a real estate investment trust that owns and invests in skilled nursing facilities, which are then leased to qualified operators as triple-net leases. The trust generates fixed rents, with the tenants responsible for all other expenses related to the property, including maintenance, insurance, property taxes, and more, making it an ideal choice for landlords, who don’t assume any risks.
The stock continues to be weighed down by the waning financial health of one of its top operators, Agemo. This single operator constitutes nearly 6% of the trust’s overall rental income, and during the quarter, Omega made a $90 million advance to the company to cover working capital costs and remains in the process of restructuring its agreement with Agemo.
While the pressure on margins, owing to high staffing and operating costs on the tenant side remains a cause for concern, the fallout from Agemo is unlikely to have any material impact on quarterly dividends.
Omega’s biggest strength remains its diversity, not just when it comes to operating partners, but also in geographic regions, with its 920 facilities located across 42 states, with 88 located overseas in the UK.
The surging interest rates and bond yields have taken the sheen off the stock, but nursing facilities remain as critical as ever, making Omega a sturdy defensive pick for the long term.
This is especially true when considering the broad-based demographic tailwinds in its favor, with an estimated 21% of the total US population expected to be within the 65-plus age group by 2030. Figures within Europe are about the same. As much as 21% of patients from hospitals are discharged to skilled nursing facilities, making them a vital cog in the healthcare value chain.
Apart from the generous dividends, the company repurchased 4.2 million shares worth $115 million during the quarter, which it can afford to do given its strong liquidity profile, consisting of $160 million in cash, $5.3 billion in debt, and $650 million in cash flow.
The stock remains undervalued, offering yields in excess of 8%, with an annual dividend of $2.68 per share. The current payout ratio stands at 90.4%, which will improve further in the coming months as the recovery continues. The stock offers a perfect "foot in the door" for investors looking for deep exposure within the healthcare industry. Our target is $38.