This article is about Omega Healthcare Investors (NYSE:OHI), a REIT, and why it is a purchase for the earnings investor long run, even when OHI has a short-term drawback with one in every of its operators. I imagine that the administration of OHI is sweet and has already outlined the steps to be taken to get the Orianna properties to new operators with diminished rents.
Omega Healthcare is among the largest operators of expert nursing care properties and badisted dwelling properties. OHI is a full place at 6.Zero% in The Good Business Portfolio. OHI’s place will probably be left to develop over time and added to each time a dip like this occurs. The firm has at many instances been beneath stress and gotten all the way down to $28 vary, and every time it has bounced again, so that is one other probability to purchase into an excellent firm with a really excessive yield.
When I scanned the five-year chart, Omega Healthcare Investors has a poor chart going up and to the proper for 2013-2014, then down slowly for 3 years ending behind the market. In 2013, OHI had an excellent yr when the market was up 27%; the corporate got here in at a 30% enhance.
OHI knowledge by YCharts
Fundamentals of Omega Healthcare Investors will probably be reviewed within the following subjects beneath:
- The Good Business Portfolio Guidelines
- Total Return And Yearly Dividend
- Last Quarter’s Earnings
- Company Business
- Recent Portfolio Changes
I take advantage of a set of pointers that I codified over the previous couple of years to evaluation the businesses in The Good Business Portfolio (my portfolio) and different corporations that I’m having a look at. For an entire set of the rules, please see my article “The Good Business Portfolio: Update To Guidelines And July 2016 Performance Review”. These pointers present me with a balanced portfolio of earnings, defensive, complete return and rising corporations that hopefully retains me forward of the Dow common.
Good Business Portfolio Guidelines
Omega Healthcare Investors pbades 9 of 11 Good Business Portfolio Guideline, a good rating (an excellent rating is 10 or 11). These pointers are solely used to filter corporations to be thought of within the portfolio. Some of the factors introduced out by the rules are proven beneath:
- Omega Healthcare Investors does meet my dividend guideline of getting elevated dividends for seven of the final ten years and having a minimal of 1% yield, with 10 years of accelerating dividends and a 9.Three% yield. Omega Healthcare Investors is subsequently a good selection for the dividend earnings investor. The common five-year payout ratio is excessive at 82% due to its REIT designation. After paying the dividend, this leaves money remaining for funding in increasing the enterprise by shopping for bolt-on properties to the 1,000 it already owns or leases.
- I’ve a capitalization guideline the place the capitalization have to be higher than $7 billion. OHI fails this guideline by a small quantity. OHI is a mid-cap firm with a capitalization of $6.2 billion. Omega Healthcare Investors’ 2017 projected complete yearly AFFO move at $646 million is sweet, permitting the corporate to have the means for development and enhance dividends.
- I additionally require the CAGR going ahead to have the ability to cowl my yearly bills. My dividends present Three.2% of the portfolio as earnings, and I want 1.9% extra for a yearly distribution of 5.1%. The one-year ahead CAGR of seven.Zero% meets my guideline requirement. This good future development for Omega Healthcare Investors can proceed its uptrend benefiting from the continued development of the senior citizen inhabitants.
- My complete return guideline is that complete return have to be higher than the Dow’s complete return over my take a look at interval. OHI fails this guideline because the complete return is 64.33%, lower than the Dow’s complete return of 78.53%. Looking again, $10,000 invested 5 years in the past would now be price over $18,700 right now. The complete return within the good yr of 2013 was 29.6% in comparison with the Dow acquire of 27%, a small beat. This makes Omega Healthcare Investors a good funding for the entire return investor that has future development because the senior citizen sector continues to develop. As an added plus we’ve got President Trump slicing company taxes (each home and overseas) which is able to enhance earnings barely.
- One of my pointers is that the S&P ranking have to be three stars or higher. OHI’s S&P CFRA ranking is three stars or maintain with a current calculated goal value to $35.four, pbading the rule. OHI’s value is presently 25% beneath the goal. It is beneath the goal value at current and has a low value to AFFO of 10.eight, making it an excellent purchase at this entry level if you’re a long-term investor that desires earnings with an above-average dividend yield.
- One of my pointers is would I purchase the entire firm if I might. The reply is sure. The complete return is weak, however an above-average yield makes OHI an excellent enterprise to personal for earnings with reasonable development long run. The Good Business Portfolio likes to embrace every kind of funding types however concentrates on shopping for companies that may be understood, makes a good revenue, invests income again into the enterprise, and likewise generates a good earnings stream. Most of all what makes OHI fascinating is the potential long-term development, as extra expert nursing care amenities are required and the earnings for the earnings traders is nice.
Total Return And Yearly Dividend
The Good Business Portfolio Guidelines are only a display to begin with and never absolute guidelines. When I have a look at an organization, the entire return is a key parameter to see if it matches the target of the Good Business Portfolio. Omega Healthcare Investors misses the Dow baseline in my 56.Zero-month take a look at in comparison with the Dow common. I selected the 56.Zero-month take a look at interval (beginning January 1, 2013, and ending to this point) as a result of it consists of the nice yr of 2013, and different years that had honest and unhealthy efficiency. The honest complete return of 64.23% makes Omega Healthcare Investors a good funding for the entire return investor who additionally desires a gentle growing earnings. OHI has an above-average dividend yield of 9.Three% and has had will increase for the previous 21 quarters, making OHI additionally a good selection for the dividend development investor. The dividend has not too long ago been elevated to $Zero.65/Qtr., from $Zero.64 or a 1.6% enhance for the quarter.
Dow’s 56.Zero-month complete return baseline is 78.53%.
56.Zero-month complete return
Difference from Dow baseline
Yearly dividend share
Omega Healthcare Investors
Last Quarter’s Earnings
For the final quarter, on October 30, 2017, Omega Healthcare Investors reported AFFO of $Zero.79 that missed expectations by $Zero.06 and in comparison with final yr at $Zero.82. Total income was greater at $194 million, up four.four% yr over yr and missed expectations by $44 million. This was a poor report with the underside line lacking expectations and the highest line growing. The subsequent earnings report will probably be out in late January 2018 and AFFO is predicted to be $Zero.82 in comparison with final yr at $Zero.82. The firm guided AFFO for the yr to $Three.27-Three.38, however this badumes it is going to be capable of repair the issue with one in every of its operators. Earnings will almost definitely be very unstable over the following six months.
Omega Healthcare Investors is among the largest expert nursing care and badisted dwelling amenities REITs within the United States.
As per Reuters:
“Omega Healthcare Investors is a self-administered real estate investment trust (REIT). The Company maintains a portfolio of long-term healthcare facilities and mortgages on healthcare facilities located in the United States and the United Kingdom. It operates through the segment, which consists of investments in healthcare-related real estate properties. It provides lease or mortgage financing to qualified operators of skilled nursing facilities (SNFs) and badisted living facilities (ALFs), independent living facilities, rehabilitation and acute care facilities. Its portfolio consists of long-term leases and mortgage agreements. As of December 31, 2016, its portfolio of investments included 996 healthcare facilities located in 42 states and the United Kingdom and operated by 79 third-party operators. As of December 31, 2016, the Company’s portfolio consisted of 809 SNFs, 101 ALFs, 16 specialty facilities, one medical office building, fixed rate mortgages on 44 SNFs and two ALFs.”
The graphic beneath reveals the kind of amenities required right now. With seniors remaining energetic into their 80s, 90s and past, expert nursing amenities proceed to evolve to satisfy the upper expectations new generations of seniors and their households need on the subject of facilities, décor and care.
Source: Omega Healthcare Investors Web Site
Overall, Omega Healthcare Investors is an efficient enterprise with a 7% CAGR projected development as extra expert nursing care amenities are wanted going ahead. The good AFFO offers OHI the potential to proceed its development by growing income because it buys bolt-on properties and will increase dividends.
Also as a tailwind, we’ve got President Trump eager to decrease company taxes on earnings. As the company tax charge is lowered, earnings of OHI ought to enhance barely.
The financial system is displaying reasonable development proper now (about 2.9%), and the Fed has raised charges in June 2017, with future charge will increase depending on the United States financial system and inflation. The Fed tasks for yet another enhance in 2017. I really feel the Fed goes slowly; it does not wish to set off a slowdown within the financial system.
From October 30, 2017, earnings name, Taylor Pickett (Chief Executive Officer) mentioned:
Adjusted FFO for the third quarter is $Zero.79 per share. Funds accessible for distribution, FAD for the quarter is $Zero.73 per share. The discount in adjusted FFO and FAD is primarily badociated to changing the Orianna portfolio to money foundation accounting with no adjusted FFO or FAD acknowledged for Orianna within the third quarter.
During the third quarter, we cooperatively accomplished the transition of Orianna’s Texas amenities to a different Omega operator, and we accomplished the sale of the Northwest amenities to 2 consumers. Unfortunately, the remaining portfolio continues to underperform and Orianna continues to use free money move to pay down overdue distributors and different obligations.
We are in energetic discussions with Orianna’s house owners and consultants concerning the potential transition and/or sale of sure property versus a federal or state courtroom restructure. We are hopeful, we are able to develop an out-of-court plan, which if profitable, would doubtless end in money rents of $32 million to $38 million per yr, as in comparison with the present annual contractual hire of $46 million.
“We remain confident in our ability to pay our dividend, increasing our quarterly common dividend by $0.01 to $0.65 per share. We’ve now increased the dividend 21 consecutive quarters. Our dividend payout ratio remains conservative at 82% of adjusted FFO and 89% of FAD, and we expect these percentages will improve as the Orianna facilities return to paying rent. Our revised 2017 guidance reflects the impact of Orianna’s cash accounting and our anticipation that no cash were received for the balance of the year. “
This reveals the emotions of the highest administration for continued development of the enterprise and shareholder returns and the motion being taken to repair the issue with Orianna.
From October 30, 2017, earnings name Daniel Booth (Chief Operating Officer), mentioned:
“Turning to new investments. During the third quarter of 2017, Omega completed two new investments totaling $202 million, plus an additional $36 million of capital expenditures. Specifically, Omega completed $190 million purchase lease transaction for 15 skilled nursing facilities in Indiana and as part of that same transaction simultaneously completed a $9.4 million loan for the purchase of the leasehold interest in one skilled nursing facility with an existing Omega operator.”
This reveals that OHI remains to be rising even with an operator in bother.
Omega Healthcare Investors is a superb funding selection for the long-term earnings investor with its excessive yield and a good selection for the entire return investor. I take this downturn as a long-term alternative to get an ideal earnings stream at a cut price value. Omega Healthcare Investors is 6.Zero% of The Good Business Portfolio and will probably be held as we watch it develop over time. If you need a rising earnings, OHI stands out as the proper funding for you, however it is going to be unstable for the following six months and you ought to be a long-term investor.
Recent Portfolio Changes
- Increased the place of Omega Healthcare Investors to six.Zero% of the portfolio. I needed somewhat extra earnings and to benefit from the current dip in value.
- Recently, on October, 16 trimmed Boeing (BA) from 11.Three% of the portfolio to 11.Zero%. An amazing firm, however it’s important to be diversified. The Paris Air Show was nice for Boeing, and it simply beat Airbus (OTCPK:EADSY) in orders by a mile.
- Wrote some L Brands (LB) November 17 strike 42.5 calls on the a part of the holding. If the calls stay within the cash close to train time, they are going to be moved up and out.
- Increased the place of L Brands to three.2% of the portfolio; I imagine the downturn in LB is nicely overdone.
- Increased place of GE (NYSE:GE) to four% of the portfolio, a full place. GE has now change into a price and earnings play.
- Sold the Harley-Davidson (HOG) place from the portfolio and can watch it see if President Trump cuts company taxes or brings overseas income again at a low tax charge. This promote eliminates an underperformer and makes room for a corporation with extra current development.
- Added a starter place of 3M (MMM) at Zero.5% of the portfolio. It has an excellent regular dividend historical past, a dividend king with 58 years of accelerating dividends, and nice complete return. Please see my article “3M: Dividend King With Great Total Return”.
The Good Business Portfolio typically trims a place when it will get above eight% of the portfolio. The 4 high positions in The Good Business Portfolio: Johnson & Johnson (JNJ) eight.eight% of the portfolio, Altria Group (MO) 6.eight%, Home Depot (HD) eight.6%, and Boeing 11.Zero% of the portfolio; subsequently, BA, JNJ, and Home Depot are actually in trim place with Altria getting shut.
Boeing goes to be pressed to 11% of the portfolio due to it being money optimistic on 787 deferred aircraft prices at $316 million within the first quarter, a rise from the fourth quarter. The second quarter noticed deferred prices on the 787 go down $530 million, a giant soar from the primary quarter. The second-quarter earnings have been improbable with Boeing beating the estimate by $Zero.25 at $2.55. The third-quarter earnings have been $2.72, beating expectations by $Zero.06 with income growing 1.7% yr over yr, one other good report. Recently S&P Capital IQ raised its one-year goal to $272.
JNJ will probably be pressed to 9% of the portfolio as a result of it is so defensive on this post-Brexit world. Earnings within the final quarter beat on the highest and backside line, and Mr. Market did like the expansion going ahead. JNJ shouldn’t be a buying and selling inventory however a maintain without end; it’s now a powerful purchase because the healthcare sector stays beneath stress.
For the entire Good Business Portfolio, please see my article on The Good Business Portfolio: 2017 2nd Quarter Earnings And Performance Review for the entire portfolio checklist and efficiency. Become a real-time follower, and you’re going to get every quarter’s efficiency after the earnings season is over.
I’ve written particular person articles on JNJ, EOS, GE, IR, MO, BA, PEP, AMT, PM, LB, OHI, DLR and HD which can be in The Good Business Portfolio and different corporations being evaluated by the portfolio. If you are interested, please search for them in my checklist of earlier articles.
Of course, this isn’t a suggestion to purchase or promote, and you need to at all times do your personal badysis and speak to your monetary advisor earlier than any buy or sale. This is how I handle my IRA retirement account, and the opinions on the businesses are my very own.
Disclosure: I’m/we’re lengthy BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, LB, MMM.
I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Seeking Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.