For the past year, the performance of Omega Healthcare Investors Inc (NYSE:OHI) has been kind of middling, with a gain of 6%. But, on a relative basis, the performance has actually been fairly good as the REIT market has been out of favor. Also, consider that the Vanguard REIT Index Fund (NYSEARCA:VNQ) has flat-lined during this period.
But, this should not be much of a surprise. There have been considerable headwinds for REITS, especially in the retail market. The impact of e-commerce continues to weigh on the sector, and it is likely to get worse as Amazon.com, Inc. (NASDAQ:AMZN) plans to acquire Whole Foods Market, Inc. (NASDAQ:WFM).
At the same time, there are important macro factors at work. The Federal Reserve has been tightening policy, not only with higher interest rates, but also the paring of its balance sheet. As a result, REITs have become less attractive in terms of yield. But, there are also the nagging issues of the higher debt costs (keep in mind that these companies are major borrowers).
With OHI stock in particular, there is something else to keep in mind as well: political risks. As a major operator of Skilled Nursing Facility and Assisted Living Facility locations, the company is expected to feel the pressures of cost-cutting and changes to reimbursements.
According to a recent SEC filing:
“Any such federal legislation that reduces reimbursement payments to healthcare providers could have a material adverse effect on certain of our operators’ liquidity, financial condition or results of operations, which could adversely affect their ability to satisfy their obligations to us and could have a material adverse effect on us. Additionally, as a result of state budget crises and financial shortfalls, many states are focusing on the reduction of expenditures under their Medicaid programs, which may result in a freeze on Medicaid rates or a reduction in reimbursement rates for our operators.”
This seems scary, but I think worries are overblown for OHI stock. For the most part, the repeal-and-replace bill of the Affordable Care Act is far from a guarantee. Besides, even if it passes, the slowing in spending likely won’t take effect until 2025. So, for OHI stock, there should be continued cash flow generation for some time. And, of course, the political winds in the U.S. can change quickly, which means there may eventually be another new law.
Omega Healthcare also has a strong platform, with facilities across 42 states and the UK, as well as a solid record of execution. The tenant base is diversified, with only one accounting for 10% of overall revenue. OHI also receives fixed rent payments that include annual escalators and there are no major renewals until 2022.
As for the balance sheet, it is also rock solid. The debt/adjusted EBITDA ratio is at 4.8x and the rent coverage is at a conservative 1.69 times EBITDA.
No doubt, these kinds of metrics are critical for the dividend yield of OHI stock, which is at a hefty 7.48%.
Bottom Line on OHI Stock
The current political environment will likely present headline risk to OHI stock. The fact is that there will likely be ongoing changes and reforms to the U.S. healthcare system. It’s inevitable.
But, there are certainly offsetting factors. After all, about 10,000 Baby Boomers turn 65 every day, so even if there are cutbacks from government programs, there will still be substantial volumes of customers who will need the services that OHI provides. If anything, the big concern is that there will likely be a shortage of facilities in the coming years.
In light of this — as well as the strong finances and portfolio — OHI stock continues to look attractive for investors looking for yield along with modest capital gains.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.