Recent Purchase and Analysis of Omega Healthcare Investors (OHI)

I wasn’t expecting to make another purchase in April, but I couldn’t resist the downward price movement in the REIT sector, so I initiated a position in Omega Healthcare Investors (OHI).  OHI provides financing and capital to the long-term health care industry with a prominent focus on skilled nursing facilities located in the United States.  After suspending dividends in 2001 to meet debt obligations, this REIT has been on fire over the last decade and growing at a very attractive pace.  With an increasing senior citizen population and need for cost efficient healthcare, the future looks bright for this company.

This is a new position for me and my portfolio now holds 24 businesses.  On Wednesday, April 29th I bought 38 shares for $36.76 each and a $6.95 commission for a total transaction of $1,403.83 in my Sharebuilder ROTH IRA.  My 5.85% yield will provide $82.08 in annual income for a new 12 month total of $1,816.81.  I’m aiming to achieve impressive income and capital growth with this company and this post will cover OHI’s operations, fundamentals and valuation.

Business Overview

The number of people aged 85 and older is growing quickly at 1.5% of our current population,  and it’s estimated to swell to over 5% by 2050.  With old age comes physical and mental challenges and an ever increasing need of assisted living and medical care.  Omega Healthcare is the major player in the skilled nursing facilities (SNF) industry.  It’s an expanding market worth over $100 billion with 87% of SNF being privately owned and ripe for the picking.  OHI recently combined with Chicago based Aviv REIT to become the largest public U.S. owner of high quality skilled nursing facilities.  They’ve significantly enhanced their national and operator diversification by adding 312 new facilities and established a presence in four new states.  They now have over twice the number of SNF properties as the next public competitor which makes OHI the largest pure-play SNF REIT, with plenty of room to keep growing.

Fundamentals

OHI’s total 10 year return through the end of 2014 was an astonishing 586% which is the second highest among ALL publicly traded equity REITs.  Here are other attractive compounded annual growth rates from the same time period:

  • Real Estate Investments: 15.8%
  • Operating Revenue: 17.2%
  • Adjusted FFO per Share: 11.8%
  • OHI Share Price: 13.1%
  • Dividends: 11%

2015_APR_OHI_attractivefinancialimpact

Those are some solid and rare numbers.  It’s not often businesses are able to provide such high dividend and capital growth rates.  OHI also has strong portfolio rent coverage with no upcoming material lease expirations.  Revenue streams are very diverse with no single property contributing over 12% of the investment portfolio.

2015_APR_OHI_Strongrelationshipswithlargeandexpereiencedoperators

2015_APR_OHI_sigincreaseindiversification

The balance sheet remains strong with no long-term debt maturities until 2020:

2015_APR_OHI_Conservativecreditprofileandbalancesheetstrength

OHI’s use of cash flow is consistent, stable and conservative.  This is particularly impressive considering the large shareholder payouts they’re required by law to make:

2015_APR_OHI_provenacquisitiontrackrecord

2015_APR_OHI_proventrackrecord2

OHI has a specific vision for future success stating they plan to:

  • Leverage the unique consolidation strategy, management knowledge, expertise, and operator relationships to continue owning, acquiring and developing SNFs.
  • Leverage a disciplined approach and cost of capital advantage to fund accretive transactions.
  • Continue to strengthen the credit quality of tenant relationships.
  • Continue to improve the overall properties and investment portfolio.
  • Continue to maintain a strong balance sheet with minimal maturity and interest rate risk.
  • Continue to deliver meaningful dividend growth and total shareholder returns.

One major risk to OHI is a possible future change in medicare policy.  Also being so heavily concentrated on SNFs lacks a certain diversity, but that could also be viewed as a strength and I’m personally attracted to that pure-play factor.

Valuation

The best way to value a REIT is with free cash flow and we clearly see a growing slope upwards of that metric and for dividends:

2015_APR_FG_OHI_1

I recently read Chuck Carnvale’s precise return strategy and was motivated to use it for future purchase posts.  It’s not enough to buy a business simply because it looks like it’ll keep growing.  None of us can predict stock prices and movements; but deeply understanding those businesses and having expectations for dividend growth and total return from current prices can lead to much better conclusions on valuation.  In my purchase summary I mentioned my objective of a hybrid investment to provide high income and capital growth.  Let’s run a few quick fast graph calculations to help estimate whether this investment might be on the right track in the coming years.

  • Analyst Estimates:  This calculation uses S&P Capital IQ data to help us predict a reasonable return:

2015_APR_FG_OHI_2

With growth capitalized at a reasonable P/FFO ratio of 15, we witness an enviable 23.41% total annual rate of return in 2016.  That’s a $11.46 gain in price and $3.76 gain in potential prorated dividend income.  Here’s how often OHI has met analyst expectations:

2015_APR_FG_OHI_3

 

  • Historical Compounded Annual Growth Rate (No Analysts):  Here I use the lowest annual growth rate from the last decade which is a 7 year annual return of just 10.9%:

2015_APR_FG_OHI_4

We witness an annual rate of return of 21.89% from here through 2018.

  • Conservative Expected Growth: Here I use the decades lowest historic cash flow growth rate of 10.9% combined with the lowest historical normal P/FFO ratio of 12.3:

2015_APR_FG_OHI_5

We see a much lower and conservative annual rate of return through 2018 of just 7.85%.

  • Most optimistic Case:  This calculation is based on its premium normal 10 year P/FFO ratio of 13.7:

2015_APR_FG_OHI_6

We see an annual rate of return of 17.39% into the year 2016.

  • Most Pessimistic Case: This calculation is based on the lowest normal P/FFO multiple of 12.3 over the last 10 years:

2015_APR_FG_OHI_7

We see an annual rate of return of 10.66% into the year 2016.

  • Dividend Expectations: A historic 10 year look at dividends compared to the S&P 500:

2015_APR_FG_OHI_8

The total dividend income of a $10,000 investment in OHI after 10 years trumps the S&P 500 producing over $24,000 verses just $3,000 with dividends reinvested.  If that’s not enough we also see that the total annualized rate of return was 20% compared to just 7.8% of the S&P 500.

Conclusion:  

What a beautifully run and fundamentally strong business for my stated high yield and growth objective.  I’m much more comfortable investing after digging in and calculating so many return possibilities on such different metrics and I believe the stock is current fairly valued.  It’s no surprise that I’m mainly impressed with OHI’s commitment to dividend growth, and while I expect it to slow down in 2015, I trust management will have the opportunity for plenty of increases in the future.  I hope to take advantage of short-term market noise and double down on this position at an even more advantageous price later in the year.  Since I’ve wanted to own this business for a long time, I gladly started a small position at today’s prices.

What do you think about Omega Healthcare Investors?

My Dividend Growth

http://www.mydividendgrowth.com

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38 thoughts on “Recent Purchase and Analysis of Omega Healthcare Investors (OHI)
  1. JC

    Its been difficult to not add more shares to my portfolio. Im still hesitant to add mych to my REITs but they keep looking better everyday. Darn capital being limited. I really like the company and it looks pretty attractive here. Thanks for the analysis as well. I prob need to check in to getting a subscription and maybe be able to write it off as a blogging expense. Have a great weekend.

     
    Reply
    1. My Dividend Growth

      I hear you on the dubiousness of adding here and I’m curious to feel out my own situation when it comes time to average down. I wonder how much further REITs will fall with interest rate scares included in the news every day now. I’m happy to take a long position in a wonderful business and ride out the waves. I’d love to see your blog powered with some fast graphs, I always suggest watching the tutorial videos on youtube and testing the free trial, I’d be curious to hear your thoughts because I love it and receive no compensation for recommending it. It’s awesome hearing from you, JC! Thank you for stopping by!

       
      Reply
  2. roadmap2retire

    Congrats on the purchase of this fantastic company…seems be quite popular with all DGIs this week. Great price to initiate or add here, but I have it already as one of my largest positions…so i am not adding here.

    A great analysis – thanks for putting it together.

    R2R

     
    Reply
    1. My Dividend Growth

      I’ve been waiting on the sidelines far too long on OHI and finally saw a chance to own some. I’m so happy to be aboard with you, even if it means some short term noise and an eventual opportunity to buy more. I’m glad to be in the same company of Dividend Hawk and DivGro over the week who I saw buying shares, I have mad respect for those guys and their purchases. Thanks for all your support, R2R!

       
      Reply
  3. Dividend Hustler

    Great purchase Ryan. With all the analysis you did, damn that was informative. Since you believe in this company now, if it drops further, get ready. You gotta load up more ! 🙂 I’m happy for you and it’s nice to see the progress you’ve achieved. It’s only gonna get better. Keep it up bud. You’re doing fantastic and it’s always nice stopping by. Take care bud.

     
    Reply
    1. My Dividend Growth

      Thanks a ton, DH. I really hope you’re right and I get a chance to load up again, I really like this one. You’ve set a great example on progress my friend, it’s always inspiring to get support from someone as successful as yourself. Good to hear from you!

       
      Reply
  4. Becky

    This analysis put a smile on my face! Great minds think alike…I bought 83 shares of OHI on 29 Apr for $36.70. Thanks for a fantastic write up

     
    Reply
  5. Plant money tree

    Congratulation on new position and very good analysis.
    this is call timing. I just purchase OHI on april-30 almost same price.
    company`s cost of full time employees position just 27 with that big company.

    and looking to load up some rail stock like CNR-T OR UNP
    Thanks.

     
    Reply
    1. My Dividend Growth

      Good to hear from you and thanks a ton! Great move there, it’s always a good sign when so many people see such obvious value. I hope we get the chance to add again for a little cheaper, but I wanted to start a position just in case. I really like UNP and don’t know much about CNR-T, I’m going to have to look into it. Thanks for the idea and have a great weekend!

       
      Reply
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  7. Zero to Zeros

    Fantastic purchase Ryan! I myself just bought some shares of OHI a week ago at about $38ish, but I wish I had waited just a few more days to get in at the price you did! Haha

    Thanks for posting such a thorough and well thought-out analysis. I was going to write up my own but I was feeling lazy so I ended up just linking to yours instead 😛

    Keep up the great work as usual brother.

    Cheers! 😀

     
    Reply
    1. My Dividend Growth

      Thanks Alex! You made an excellent long term purchase at $38. I think that’s a very fair price for this amazing company. You’ll be walking around with so much swagger you won’t even care what you paid a decade from now. You’re making terrific purchases and coming out swinging, great job so far man. I want to at least double this position by the end of the year and possibly throw some more at Realty income if it ever comes down to earth. The support and link on your blog means a lot, very kind of you. I hope you have a great rest of your weekend!

       
      Reply
  8. Dividend Gravy

    A very nice analysis, Ryan. I own several REIT stocks, but have yet to buy into OHI. I have definitely been tempted though, and may take a small bite sometime this month. Still not sure. REITs are about 10% of my dividend income now, so I can’t go gangbusters on further buys. Unlike you, I’m not sure if I like the pure-play status of OHI. Got me some thinking to do.

    Steve

     
    Reply
    1. My Dividend Growth

      Great to hear from you Steve and thanks. I wish I had more REITs like you, I still regret not buying more Realty income when I had the chance, but that was before I even started this blog. I like OHI because it’s still pretty small compared to the big guys like Ventas with plenty of room for possible future segment expansion. But for now the pure play status weirdly reminds me of something like a young coca-cola before they added a ton of brands to their portfolio. I like idea of becoming the dominate player where cash and growth are easy and swift and then getting large enough where branching into other segments becomes easier and safer. But who really knows if OHI would ever branch out? I assume that would be the plan after they control as much SNF as they want. Interesting to think about indeed. Thanks for the excellent comment!

       
      Reply
  9. FrugalityToFinancialFreedom

    Great purchase Ryan, I bought OHI the same day as your purchase date and at almost the same price. Thanks for sharing your buy and analysis, it adds an extra reassurance in my part, and like you I would love to add on price weakness.

    Take care

     
    Reply
    1. My Dividend Growth

      My pleasure and thank you FTFF. I feel reassured that you picked some up too, I bet we were within a few hours. I’m really looking forward to this holdings future, so here we go. Let’s hope we can add soon at over 6% yield. Best wishes!

       
      Reply
  10. No More Waffles

    Ryan,

    Congrats on another fantastic purchase! OHI seems to be doing rounds in the DGI community lately and I can’t blame those picking up a few shares here and there.

    Solid fundamentals, high yield, excellent growth prospects, strong portfolio diversification, … Everything a REIT should offer to investors.

    Kudos for the extensive analysis!

    Cheers,
    NMW

     
    Reply
    1. My Dividend Growth

      Hope all is well and thanks, NMW. I’ve seen so many other people buying too and it’s great to know they see the same value. You’re doing some awesome work over there yourself and it’s very inspiring so keep at it man!

      ~All my best.

       
      Reply
  11. Dividend Mantra

    Ryan,

    Great analysis. Glad to see you really did your homework here.

    OHI has been very good to me. No complaints at all. Excited to see how the acquisition plays out. REITs have been weak lately, which seems to be providing some opportunity. May add to my WPC position sometime this month, but OHI is a great choice as well. Similar valuation/yield.

    Glad to be a fellow shareholder! 🙂

    Best regards.

     
    Reply
    1. My Dividend Growth

      I’ve been wanting to join you in OHI for a long time now, so glad to jump aboard. I have good feelings about combining with Aviv, it’ll be interesting to watch for sure. WPC is a great pick too, and I really like your thought process on that one. Always great to hear from you and thanks for the comment!

       
      Reply
  12. Dividend Gremlin

    Ryan,

    Excellent analysis. OHI looks awesome, and that is a great move adding it to your Roth so you can take maximum advantage of it for a long time. I am thinking my next move in my Roth, whenever that is, will be for an REIT. Its sweet having that kind of income generator shielded in a Roth. I just hope the price points stay juicy by the time that happens.

    Enjoy it,
    Gremlin

     
    Reply
    1. My Dividend Growth

      Thank you much Gremlin. Great point about the ROTH IRA, REITs and Canadian stocks will probably fill that account from now on for me. I’m thinking even if I end up wanting to retire early, I can still pull contributions out at that point in the form of dividend income and I should have about 10 years worth before the taxable account would have to support me on its own. I think that’d work out just fine. But that’s a whole different conversation hehe. Hope all is well with you over there and take it easy my friend!

       
      Reply
  13. FerdiS

    As you know, I bought OHI myself recently. Hopefully, we’ll get a good chance to buy more shares at a better entry point. My timing wasn’t too good, buy I really like the yield and the history of this REIT.

     
    Reply
    1. My Dividend Growth

      I’m in good company with you, Ferdi. It’s a great feeling seeing so many top notch investors like yourself hop aboard, I’ll be curious to see how the price moves from here. I think your timing was just fine for this outstanding REIT, it shouldn’t matter much in the next few years anyway. Wishing you lots of continued success and thanks for stopping by!

       
      Reply
  14. DivGuy

    Not too surprised by this buy as it has been quite popular lately. But, really, no one could blame! 😉 It shows nice fundamentals and you put up a very detailed and complete analysis there. Good work and good buy too!

    Cheers!

    Mike

     
    Reply
    1. My Dividend Growth

      Thanks Vivianne, that’s a nice compliment. REITs aren’t too tricky, I think you’ll get it right away, and they work great in a tax sheltered account. Take it easy and thanks for checking in!

       
      Reply
  15. TwoInvesting

    Ryan,

    Great analysis! I’ll definitely be keeping OHI in mind. Due to tax concerns, I usually only like keeping the REITs in an IRA. Unfortunately, I’ve maxed out my Roth IRA for the year already. Hopefully it will be as well valued come January! OHI seems like it is pretty popular with the dividend investing crowd lately! Take it easy.

     
    Reply
    1. My Dividend Growth

      Thanks for that, Scott. I hear you on the IRA, I’ve got room for about a purchase and a half and planned to wait for any further scares later in the year. But OHI is already down almost 5% from where I bought it, so I might not get to wait too long. We’ll have to see. Good to hear from you and take it easy my friend.

       
      Reply
    1. My Dividend Growth

      I happy to see them dropping too! It’s fun to look decades out like that, especially if everything goes according to plan. I’ll be glad to ride out the waves with you here. Thanks for the comment!

       
      Reply
  16. Ken

    Thanks for the excellent analysis and for doing a lot of the homework for me. I added OHI to my retirement portfolio today.

     
    Reply
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