Omega Healthcare Can Continue Rallying And Work Its Way Back To Dividend Growth

seekingalpha08-21

Patience pays off as Omega Healthcare Investors sees strong Q2 results and potential for dividend growth.OHI's fundamentals remain strong, with a focus on skilled nursing and assisted living ...

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PM ImagesPatience is an overlooked characteristic as many investors get caught up in headlines and focus on riding the wave higher. Big tech has dominated the news cycle when it comes to investing as AI overtook cloud computing as the new narrative. While technology has been one of the strongest catalysts for the markets reaching ongoing all-time highs, some sectors that some consider boring have been on the move and still look interesting. Many REITs experienced hardships during the pandemic, and some are still trading at a discount that is lower than their pre-pandemic levels. As the population ages, I believe that skilled nursing facilities (SNF) and assisted living facilities (ALF) will become increasingly important, and Omega Healthcare Investors (NYSE:OHI) leases 866 facilities to 73 operators. OHI is a REIT that many wrote off during the pandemic when the challenges continued to compound as investors bought into the doom and gloom scenario rather than digging deep into the metrics. I have been long OHI since before the pandemic, and since the pandemic, I have maintained a bullish investment thesis. OHI is turning the corner, and Q2 2024 should dismantle any bearish sentiment that is still lingering around this REIT. Despite rising 22.99% YTD, I am still bullish that OHI can finish the year above $40.   Seeking AlphaFollowing up on my previous article about Omega Healthcare Investors Even when OHI fell below $30, I was bullish because of its fundamentals and metrics. I have been a shareholder of OHI since the end of 2017, and despite investor sentiment shifting during the pandemic, I continued to let the dividends compound, and it's paying off. Since my last article I wrote in May about OHI (can be read here) shares have appreciated by 19.03% as they are at the top end of the 52-week highs. The S&P 500 increased by 5.28% over the same period, and when OHI's dividend was included, its total return was 21.15%. I am following up with a new article to discuss the Q2 results, why I think this was a turning point, and the possibility of breaking out above $40 in 2024.   Seeking AlphaRisks to investing in Omega Healthcare Investors OHI hasn't been an easy REIT for investors to allocate capital to over the years. While the operating environment looks to be getting better OHI, a lot still depends on the government as Medicaid and Medicare represent 83% of their facility payor mix. If the government changes the reimbursement rates in a way that's unfavorable to SNF and ALF facilities, it could impact OHI's operators and potentially impact OHI's ability to collect rent from their tenants. If the Fed doesn't cut rates and if inflation reverses higher, it could impact OHI's profitability model. There are many unknowns when investing in OHI, as several risk factors are outside of OHI's control. While Q2 was strong, and the dividend looks to be in a much better position, a change to the funding structure could bring fears about a dividend cut front and center again. While I am bullish on OHI, there are many risk factors to consider, especially with the national debt reaching all-time highs.   Omega Healthcare InvestorsPatience is paying off, and my investment is a prime example of what can be achieved I have been a shareholder of OHI since the end of 2017. OHI has paid 28 dividends since I started my position, and the impact of reinvesting them has been bullish on my position. I hold OHI in several accounts but have used my original purchases to illustrate exactly how my investment has grown over the years. I started by purchasing 100 shares at the end of 2017, and then, when OHI dropped, I dollar cost averaged into the position by adding 63 more shares at the beginning of 2018. My original investment in this account is around $4,900, with an average price per share just below $30. In the chart below, I have plotted every dividend I have collected, and the first dividend was declared before I purchased the additional 63 shares, so it is significantly lower than the following dividends. Since Q4 2017, I have collected 28 dividends and generated $3,992.44 in dividend income. I am going to go through all the metrics, and I think it will outline why income investing can be exciting and how being patient can pay off.   Steven FiorilloSince my initial investment in OHI, I have generated $3,992.44 in dividend income, which is 81.89% of my original investment. By reinvesting the dividends, I have added 124.97 shares without allocating additional capital toward my investment in OHI. When I started with the 2nd dividend because of the additional shares I purchased, the quarterly dividend payment has increased by $80.37 (73.62%) from $109.18 to $189.55. The combination of OHI increasing the annualized dividend from $2.60 to $2.68 since I have been a shareholder and my share count increasing by 76.67% from 163 to 287.97 has positively impacted my forward dividend income. The original batch of shares was projected to generate $423.80 of annual income. After reinvesting the 28 dividends, I have increased my forward dividend income by 82.11% to $771.77. Now that shares of OHI are back into the upper $30s I am up 122.86% ($5,989.85) on my investment, which works out to around an 18.2% annualized return. This is largely due to reinvesting the dividend income. In this account, I am now sitting on an investment that has grown more than 120% and is generating $771.77 in forward annual income which is around a yield of 7.11%. I plan on remaining a shareholder of OHI for a considerable amount of time, and even if OHI doesn't increase the dividend over the next several years, the dividend income that I expect to generate will be impactful to my investment. Through the end of 2029, OHI will pay 21 more dividends as long as the dividend remains a component of the investment. After the Q3 2024 dividend was issued, my average quarterly dividend growth rate is 2.14% from Q1 2018 through Q3 2024. When I assign a forward dividend growth rate of 2.14% to the future dividends, which is represented by the orange color in the chart below, I am projecting that the quarterly dividend will increase by 56% from $189.55 in Q3 2024 to $295.69 in Q4 2029. I am expecting that I will generate around $5,065.96 in additional dividend income through 2029. At this rate, I will have collected $9,058.39 in dividend income for the duration of the investment into OHI, which will be 185.58% of my initial investment. Hypothetically, If OHI trades higher and my average price per share through 2029 is $43 when reinvesting the dividends, I am expecting to add an additional 117.81 shares. This would put me at 405.78 shares and increase my forward dividend income to $1,087.50 from $423.80. If OHI gets back to dividend growth, I believe that the impacts from reinvesting the dividends will be greater, and my investment will pay off even more. Sometimes, all you need is patience and perseverance, as boring income-producing investments can work wonders over an extended period of time.   Steven FiorilloOmega Healthcare Investors just produced a strong Q2 and I think they can get back to dividend growth There wasn't much to complain about after OHI delivered their Q2 earnings, and the market seems impressed as shares are trading up since 8/1. OHI delivered a top and bottom line beat in Q2 as revenue came in at $252.7 million, and their FFO was $0.71 per share. OHI's revenue increased 1% YoY and beat consensus estimates by $45.69 million, while their FFO of $0.71 per share came in $0.03 higher than what the street was looking for. The biggest takeaways for investors should be that OHI increased their FFO guidance for the 2024 fiscal year to above where the consensus was and that the dividend payout ratio is below 100%. It's always been one thing after another regarding the bear case, from tenant concerns to a reduction in the dividend due to OHI's funds available for distribution being lower than the dividend being paid. The reason I have been able to maintain conviction is because I read through the 10-Qs and evaluate what is happening with the business every 3 months. Senior leadership has actively managed the situation and continued to make strategic investments while fear was driving the narrative. In Q2, OHI repaid $400 million of its debt which was tied to senior unsecured notes. OHI also allocated $115 million toward acquisitions and deployed $106 million toward its lending segment as they completed $221 million in investments throughout Q2. We're halfway through Q3, and OHI has completed $373 million of new investments in Q3, which has brought their YTD investment activity to $648 million. The combination of the investments being accreditive to OHI while their tenants operating metrics improve has put OHI back in a position of strength that shouldn't be dismissed. OHI has 866 facilities in its portfolio which are tied to triple net leases. When it comes to REITs, triple net leases are my favorite because the tenant is responsible for every from the taxes to the repairs. OHI has structured these leases where 96% of the rent is tied to master leases. OHI has 93% of their rent and interest tied to fixed-rate escalators, with the average weighted fixed escalator is at 2.2%. OHI has a robust book of long-term leases with their tenants, as the average lease has a duration of 9.4 years. Looking forward, OHI's revenue is protected as 95% of their leases expire after 2026, with over 50% expiring after 2033. The combination of the long-duration leases with fixed escalators and new investments should provide growing revenues for years to come. OHI was able to drive $117 million of net income to its bottom line in Q2 2024, which worked out to $0.45 per share compared to generating $62 million or $0.25 per share in Q2 2023. OHI's Nareit FFO came in at $189 million or $0.72 per share, which was also a significant increase from Q2 2023, when they generated $155 million or $0.63 per share.   Omega Healthcare InvestorsWhen Q4 earnings came out, senior leadership warned that Q1 and Q2 earnings would be impacted by restructuring efforts. The big concern was that the funds available for distribution in Q1 came in at $168 million, which was ahead of the $147 million generated in Q1 2023. On a per share basis the FAD was $0.60 in Q1 2023 and $0.65 in Q1 2024, which is lower than the quarterly dividend of $0.67. OHI had gotten by with keeping the dividend intact despite coming in with lower funds available for distribution than the quarterly dividend in some quarters. This created a narrative that OHI would need to reduce the dividend like so many other REITs. Q2 was a turning point for the dividend because the funds available for distribution came in at $0.68 which was above the quarterly dividend, which reduced the payout ratio to under 100%. Management indicated on the conference call that the dividend payout ratio should drop to the mid-90 % range over the next several quarters. OHI ended Q2 with over $35 million in cash on the balance sheet and $1.4 billion in credit borrowing capacity, which provides significant room as some of the troubled tenants improve their positions. OHI is assuming that LaVie will continue to pay $3 million per month while Maplewood improves its ability to pay its contractual obligations. Management is also assuming that the new operator of the Guardian facilities will pay $2.8 million per quarter, which will be replicated in their Q2 payments. As troubled operators get back on track and OHI makes new investments, it could put them in a position to start raising the dividend again sometime in 2025 or 2026. The dividend payment ratio is now under 100%, and as new deals are implemented, fixed escalators are triggered, and previous operators catch up on their obligations, OHI looks like it will be in a much different position than they were in 2023. OHI was a dividend growth company, and there is no reason to believe that management couldn't get back to that standard. Conclusion  OHI is having a fantastic year as they are up 23% and still yielding over 7%. The dividend payout ratio is now under 100%, and as they raise guidance and improve their metrics, I think shares can break out above $40 before 2025 begins. The doom and gloom narrative around management needing to cut or reduce the dividend seems to be alleviated, and the bear case seems to be disappearing. As the population ages, there will be a growing need for OHI's facilities, making it an interesting investment as there aren't many REITs in this space. My original investment is a testament as to what can happen when you have patience, and I think OHI will become more popular in a lower-rate environment. My thesis about OHI being a candidate for capital appreciation is playing out, and I think there is still room to run while collecting a large single-digit yield. OHI is operated by a management team that is able to make difficult decisions and navigate unpredictable operating environments, which is one of the main reasons I am so confident about this investment. Over the next several years I think OHI will be looked at as an opportunity that got away for many income investors.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2461727822"}