Omega Healthcare Investors (OHI, Financial), the $5.9 billion real estate investment trust (REIT), delivered 25% operating revenue growth to $666 million and an outstanding 47.8% profit growth to $242 million in its third quarter fiscal 2016 results on Oct. 31.
The numbers indicate a profit margin of 36% for its shareholders for nine months operations in fiscal 2016Ă‚ (1).
The company’s strong top-line growth offset such 22.9% increase in its operational expenses, among all other expenses. Omega also had a 210.9% increase in assets sold, which amounted to $19.9 million that was added to its bottom line figure. The company sold 19 skilled nursing facilities during the period.
In its third-quarter operations, Omega Healthcare’s funds from operations gained by 10.2% to $162.6 million compared to its third-quarter figure in 2015 (2). The company’s adjusted funds from operations, meanwhile, grew similarly by 10% to $169.9 million in the recent quarter.
Omega Healthcare Investors’ share price depreciated by 3.4% the following day compared to the -0.68% change of the broader Standard & Poor's 500 index.
“We are pleased to report another outstanding quarter as we continue to source attractive acquisitions and deliver superior earnings and dividend growth. As we stated in August, we have returned to our 1 cent dividend increase this quarter, marking the 17th consecutive quarterly dividend increase.
“We continue to aggressively prune underperforming assets and nonstrategic relationships. As a result, we recognized modest impairments of $17 million during the quarter. Assuming the completion of asset sales currently contemplated, we expect that gains on future sales will approximately offset the impairments recorded in 2016.” – Omega CEO Taylor Pickett
Ă‚
Valuations
Omega Healthcare Investors and other REITs are not usually suitable to be valued with the traditional multiple, such as the price-earnings (P/E) ratio, but a better valuation method would be the price-adjusted funds from operations instead. (Read "How To Assess A Real Estate Investment Trust (REIT).")
Using trailing adjusted and funds from operations figures, Omega Healthcare Investors had a price-funds from operations multiple of 9.59 times and price-adjusted funds from operations of 9.07 times (3). These figures, however, are not helpful when it cannot be compared to its REIT peers.
Meanwhile, the company had a price-book (P/B) value multiple of 1.6 times (lower than 73% of its peers) and price-sales (P/S) ratio of 6.75 times (higher than 55% of peers; [4]).
Omega Health Investors also had a trailing dividend yield of 7.79% with a 146% payout ratio and -18.6% share buyback ratio.
Market performance
Year to date, Omega Healthcare Investors provided a 6.69% total return loss for its shareholders while the broader index performed with 12.8% return. Despite its recent poor performance, the company still outperformed the index on a five-year basis with 16.28% total return versus the 15.56% of the latter.
(Investor Presentation)
Omega Healthcare Investors
Omega Healthcare Investors was incorporated in 1992. It is a self-administered REIT. According to its recent annual filing, Omega Healthcare invests in income-producing health care facilities, mainly long-term care facilities located in the U.S. and the United Kingdom. Information from its recent press release indicated that the company had 97% of its investments in properties located in the U.S.
The company’s real estate investments included long-term care facilities and rehabilitation hospital investments (7). The company stated that it had only one reportable segment consisting of investments in health care-related real estate properties.
Omega provides lease or mortgage financing to qualified operators of skilled nursing facilities (SNFs) and, to a lesser extent, other related health care services operators, such as assisted living facilities, independent living facilities and rehabilitation and acute care facilities.
The company stated that it had historically financed its investments through either or combination of borrowings, private placements or public offerings of the company’s debt and equity securities, the assumption of secured indebtedness and retention of the company’s cash flow (8).
Nine months into fiscal 2016, Omega Healthcare Investors had $1.14 billion in new investments. In 2015, new investments were $4.4 billion and $566 million in 2014.
As of Sept. 30, the company had 983 properties located in 42 states and the United Kingdom and operated by 81 different operators. Most, or 88.5%, of these properties are identified as SNFs. Omega Healthcare had $7.57 billion in SNF property investments and $1.26 billion in senior housing properties (9).
In the recent nine months of fiscal 2016 operations, Omega Healthcare derived 87%, or $580 million, of its sales from its investments in SNFs. This logged a 19.6% growth when compared to last year’s operations in the same period. Revenue received from senior housing investments were $69.5 million, a 67% increase.
Also, Omega Healthcare derived most of its revenue from its investments in rental property. Nine months into 2016, the company had 82%, or $549 million, of sales coming from rental property.
Overall, Omega Healthcare Investors had five-year sales and profit growth averages of 23.6% and 30.9%.
Cash, debt and book value
As of Sept. 30, Omega Healthcare Investors had $32.6 million in cash and $4.4 billion in debt with a debt-equity ratio of 1.16 times (5). The company also had 7.2% of its total $8.98 billion assets in goodwill while having a book value of $4.18 billion, compared to $4.1 billion in December 2015.
(10-Q)
For the recent nine months of operations, Omega Healthcare Investors grew its cash flow from operations by 41.6% to $457 million year on year. As observed, increase in cash flow came mostly from depreciation and amortization, provision for impairments on real estate properties and uncollectible mortgages and lease inducements.
The company had $1 billion in capital expenditures, leaving it with a loss of $578 million in free cash flow, compared to a loss of $129 million in the same period last year (5).
Despite this negative free cash flow, Omega Healthcare Investors provided $334 million in dividends in the period. Further, the company handed out $253 million in dividends in the same time period last year.
On a nongenerally accepted accounting principles (GAAP) bases, Omega Health Investors stated that it had $455 million for its funds available for distribution for the recent nine-month period compared to $363.5 million last year. This would indicate a 73% payout, $334 million divided by $455 million.
In addition, Omega Healthcare Investors had a net positive cash flow change of $848.5 million for the period in relation to borrowings and debt repayments. The company seemed not to have any debt maturities coming up until the year 2019.
Conclusion
Given the relatively different approach that is required to assess a REIT, such as Omega Healthcare, compared to the usual simple assessment that one could perform in other companies in other industries, it would not be an easy task to discern which investment is going well for Omega Healthcare. (Read "Google Shares Can Soon Hit $1,000.")
As per its recent press release, Omega Healthcare demonstrated impressive growth in all of its investments. This was further supported by good growth figures in both GAAP and non-GAAP metrics as well.
As observed, the REIT demonstrated a less admirable balance sheet and cash flow situation. The company has too few of cash compared to its debt, but acknowledging how Omega Healthcare’s business is designed – the company relies on borrowings (and share issuance) to fund its investments –Â and therefore the 1.2 times debt ratio may be acceptable. Also, non-GAAP measures are used to justify its dividend payouts.
(Google Finance)
In summary, Omega Healthcare Investors is a pass despite its given attractive dividend yield.
Notes
(1) Previous REIT article: "HCP: Some Troubling Findings?"
REIT A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends. REITs allow anyone to invest in portfolios of large-scale properties the same way they invest in other industries – through the purchase of stock.
According to the National Association of Real Estate Investment Trusts (NAREIT), REITs comprise several sectors. A REIT can be specialized in either of the following: office, industrial, retail, residential, diversified, health care, lodging/resorts, self-storage, timber, infrastructure, data centers, specialty and mortgage.
(2) Investopedia: Both funds from operations and adjusted funds from operations are to be assessed in REITs.
(3) I used adjusted and funds from operations from fourth quarter 2015 and first to third quarters of 2016 to arrive at the trailing value.
Fourth quarter 2015: press release.
First quarter: press release.
Second quarter: press release.
Third quarter: press release.
Me: It was worth the shot in figuring out these multiples, but I would not spend my entire afternoon digging through each and every REIT’s funds from operations figures to arrive at whether Omega is undervalued, thus I assume the book value multiple and P/S ratio as "good enough" substitutes as for GuruFocus has all the related data to it.
(4) GuruFocus data.
(5) Morningstar data.
(6) EPR Canada (an accounting group):
Lease inducements are the landlord’s enticement for the tenant to enter into a lease agreement.
(7) 10-K: Investments are in the form of (a) owned facilities that are leased to operators or theiraffiliates, (b) investments in direct financing leases to operators or their affiliates and (c) mortgages on facilities that are operated by the mortgagors or their affiliates.
(8) Wikipedia:
Private placement (or non-public offering) is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors.
(9) Press release: Includes assisted living facilities, memory care and independent living facilities.
Disclosure: I do not have shares in Omega Healthcare Investors.
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