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Omega Healthcare Investors Inc. (OHI), Q2 2008

August 12, 2008 2:50 pm by Dean Morel

Omega Healthcare Investors Inc. (OHI), has been volatile since July 07.

Check out this chart to view the wild rollercoaster for this boring REIT. With those recent extremes I shouldn’t be surprised about the ride over the last four days. OHI closed last Wednesday at $17.84, it announced OK Q2 earnings Thursday morning and the conference call later that morning was likewise mixed by largely positive looking forward. Yet OHI closed down 3.5% at 17.22. Then on Friday OHI climbed 4.8% followed by a 4.5% climb today. These are big moves for a boring REIT, which chugs along increasing funds from operation (FFO) and dividends most quarters.
OHI Dividends

Look at this dividend chart or go back and check some of my posts on TMF for quarterly history and the one thing that jumps out is the predictability of these dividend increases. To make it even easier I’ve posted dividends, adjusted FFO and payout ratio below.

 

 

Qtr Dividend Ann. Div. increase Adjusted FFO Payout
Q2 05 0.22 22% 0.26 85%
Q3 05 0.22 16% 0.27 81%
Q4 05 0.23 15% 0.27 85%
Q1 06 0.24 14% 0.28 86%
Q2 06 0.24 9% 0.29 83%
Q3 06 0.25 14% 0.32 78%
Q4 06 0.26 13% 0.32 81%
Q1 07 0.27 13% 0.34 79%
Q2 07 0.27 13% 0.34 79%
Q3 07 0.28 12% 0.35 80%
Q4 07 0.29 12% 0.35 83%
Q1 08 0.30 11% 0.36 83%
Q2 08 0.30 11% 0.38 79%


The sell-off in March/April was due to downgrades on fear of Haven’s bankruptcy. Omega’s responded to concerns on April 3rd though their announcement did not appear to quell investors fears. Investors continued to sell. Selling OHI below $16 when the highest probable outcome was 100% security of the Haven mortgages and a forward growing annual dividend of around $1.22. TTM dividend was $1.11, but after the announced dividend was paid is $1.14. This increase to $1.17 after the current declared dividend is paid on August 15.
On August 6th OHI closed the book on Haven when it entered into an agreement with affiliates of Formation Capital to lease 15 facilities formerly leased to Haven Eldercare. OHI had taken possession of these facilities back in July. The damage was contained to a $4.3 million expense for uncollectible accounts receivable. That amount accounts for the majority of the 5 cent difference between FFO and adjusted FFO this quarter. They still need to ink the final deal with Formation, but investors can once again look forward.

Bad news: Due to the difficulty in projecting the operating results of the Haven portfolio, the Company has withdrawn its previous 2008 adjusted FFO available to common stockholders guidance range of $1.49 to $1.55 per common share. Assuming the Formation transaction closes during the third quarter, the Company projects fourth quarter 2008 adjusted FFO of $0.37 to $0.38 per common share.

In the conference the CEO indicated that it is impossible to predict Q3 due to the uncertainty of the Haven portfolio results. In addition to normal operating income or loss from the Haven portfolio, Omega incurred significant cost acquiring the Haven assets out of bankruptcy.

Notes from the conference call

The CEO Taylor Pickett said maintaining conservative dividend until Haven completely resolved.

Business appears strong with a lot of deals in the pipeline. They suggests the current credit markets are favourable to their business as there are fewer options for those seeking credit.

Looking forward

OHI closed at $18.86 on Monday with an intra-day high of $19.13 just a dime short of the years high. The all time high of $30 was back in Jan 1998 before OHI crashed and burnt.

Management have not provided any forward guidance other than the Q4 adjusted FFO estimate of $0.37-0.38. My adjusted FFO estimates for 2009 and ensuing calculations do not show much upside in the price. In the past this has not been enough to make me consider selling OHI. This time it is different. Here is why I have decided to sell my OHI shares and why I placed a limit order.

  • Better opportunities elsewhere. I follow the Seth Klarman’s dictum to

    “replace current holdings as better bargains come along.”

    Or at least my version of it. I don’t see the need to pair my transactions and am happy to sell OHI knowing that there is a lot of value in the market at the moment for me to choose between.

  • Though past price charts are not necessarily indicative of the future, I believe I will be presented with an opportunity to buy OHI at lower prices over the next year. I see the momentary downside as greater than the upside. This could occur if the Q3 results are disappointing, which considering the withdrawal of guidance is a real possibility.
  • I have capital losses available to offset the large capital gains I’ll receive from selling OHI.

Background

FFO, which the real estate industry uses to gauge operating performance, adds depreciation, amortisation and other non-operating items, back to net income.

OHI have a target payout percentage of 80% to 85% of adjusted FFO. As a real estate investment trust, Omega doesn’t pay income taxes, but instead passes along at least 90% of taxable earnings to shareholders. $0.30 per share to be paid August 15, 2008 to common stockholders of record on July 31, 2008.

For a good overview on how OHI and how they make money read this article by Carla Pasternak at Seeking Alpha.

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