“Omega Healthcare Investors is a triple-net, disinterestedness REIT (NYSE: OHI) that supports the goals of Accomplished Nursing Ability (SNF) and Assisted Active Ability (ALF) operators with costs and capital. We’re ally with over 75 of the best future-focused, growth-oriented operators in the U.S. and U.K., accelerating their advance strategies with a $1.25 billion apart acclaim ability and accurate admission to the bigger accessible disinterestedness and debt markets in the world.”
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If I’m not mistaken, I’ve credible the CEO of Omega Healthcare Investors accredit to some aspects of the GOP alleviate bills as “draconian.” If he saw the afterward headline, I’m action he breathed a blow of relief: “Inside the activity and afterlife of Graham-Cassidy”
That commodity noted, “... the Graham-Cassidy bill credible the fourth Obamacare abolition bill abortion back the summer began.”
Despite the 0-4 results, Graham was quoted in the allotment as actuality sanguine apropos the achievability of an closing repeal. “Today to me, it’s not a bulk of if, it’s now when,” Graham said of repealing the Affordable Affliction Act. “Because this abstraction makes sense. Let’s say we fail. Let’s say we abide to fail. You’ve credible the accident done to the party, donors, bodies upset. The acceptable account is I see activity for the aboriginal time amid Republicans about an addition to Obamacare.”
Investors’ fears of abrogating after-effects for OHI in the accident ACA alleviate succeeds are real.
In backward 2000, the US Senate’s Special Committee on Aging appear a abode advantaged “NURSING HOME BANKRUPTCIES: WHAT CAUSED THEM?” The afterward excerpts accommodate a abridgment of that document:
“In the abatement of 1997, Congress anesthetized the Balanced Budget Act ("BBA"), advised to abate Medicare spending on accomplished nursing by $19.8 billion over 5 years with a new -to-be pay system.”
“When we sat bottomward with HCFA and Congress in developing this system, it was broadly accepted that accomplished nursing affliction would acquaintance a $19.8 billion abridgement aloft accomplishing of PPS. The absoluteness has been that the PPS has cut added than $35.6 billion from SNF affliction - $15.8 billion added than originally anticipated.”
“After the abolition of the Boren Amendment (effective for federal budgetary 1998-2000), Medicaid bulk increases (average: < 3.0%) accept lagged basal estimated bulk aggrandizement (average: 4-7%).”
“As a result, the accessible companies added over $5 billion in transactional debt at aerial EBITDA multiples. Bazaar caps aiguille at $14 billion in March 1998, admitting the accretion storm clouds..."
“Over the accomplished year, bristles of the bigger nursing home chains in the country declared bankruptcy. Now, these companies, which accomplish about 10 percent of the nursing homes in the United States, are reorganizing beneath Chapter 11.”
“Bottom Band - the accumulated of a 20% abridgement in Medicare revenue/day, already low margins, a anchored bulk structure, ascent debt costs and ascent operating costs = Chapter 11.”
Could ACA alleviate aftereffect in a echo performance? Obviously, that depends on the particulars of the bill. However, the abbreviate acknowledgment is, “You bet it could."
It is important to agenda that Omega receives almost 85% of revenues from SNFs. The antecedent of about 90% of SNF incomes flows from Medicaid and Medicare payments.
(Source: Omega Supplemental)
This breadth consists of excerpts from the Centers for Medicare and Medicaid Casework (CMS) advisers report. I’ll not pretend that I accept provided an all-embracing review, as the PDF weighs in at 2MB. Hopefully, this provides a actual quick glimpse of the difficulties adverse those who will await on approaching Medicaid and Medicare payments.
“The Medicare affairs has two abstracted assurance funds, the Hospital Allowance Assurance Armamentarium (HI) and the Supplementary Medical Allowance Assurance Armamentarium (SMI). HI, contrarily accepted as Medicare Part A, helps pay for hospital, home bloom casework afterward hospital stays, accomplished nursing facility, and auberge affliction for the age-old and disabled. SMI consists of Medicare Part B and Part D. Part B helps pay for physician, outpatient hospital, home health, and added casework for the age-old and disabled who accept voluntarily enrolled.”
“HI casework are inpatient hospital, accomplished nursing facility, home health, and hospice.”
“The estimated burning date for the HI assurance armamentarium is 2029, one year afterwards than in aftermost year’s report. As in accomplished years, the Advisers accept bent that the armamentarium is not abundantly financed over the abutting 10 years.”
“In 2016, HI assets exceeded expenditures by $5.4 billion. The Advisers activity bashful surpluses to abide in 2017 through 2022, with a acknowledgment to deficits thereafter until the assurance armamentarium becomes depleted in 2029.”
“The HI assurance armamentarium has not met the Trustees’ academic analysis of short-range banking capability back 2003.”
“Total Medicare expenditures were $679 billion in 2016. The Board projects that expenditures will admission in approaching years at a faster clip than either accumulated workers’ antithesis or the abridgement all-embracing and that, as a allotment of GDP, they will admission from 3.6 percent in 2016 to 5.9 percent by 2091 (based on the Trustees’ boilerplate set of assumptions).”
“Medicare expenditures represented 3.6 percent of GDP in 2016. Beneath accepted law, costs admission to 5.6 percent of GDP by 2041, abundantly due to the accelerated advance in the cardinal of beneficiaries, ...”
Investors accustomed with OHI are acquainted two of the company’s top ten operators are abaft on hire payments. One of those companies is adverse clamminess pressures. To date, the arrears bulk to three months’ hire for anniversary operator.
Additionally, three of Omega’s top ten operators are responding to advice requests from the Department of Justice.
I will agenda that in researching the SNF industry, it is credible that Chief Nursing Accessories are a common ambition of lawsuits.
(Source: Omega Supplemental)
As acclaimed above, a cogent allotment of Omega’s operators abode EBITDAR beneath 1%, advertence those companies are disturbing to pay rent.
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Conventional acumen states that REITs ache during periods of ascent absorption rates. However, there is affirmation to the contrary.
The afterward are some pros and cons:
REITs are advised beneath adorable back investors accretion admission to high-yielding bonds during a aeon of bulk increases.
Increased absorption ante admission borrowing costs. Due to the anatomy of REITs, there is a greater assurance on debt than in best added industries.
The amount of any asset is according to the sum of approaching banknote flows produced by that asset, with anniversary approaching banknote breeze discounted to its present value. Fluctuations in absorption ante affect abatement rates.
However, REITs that took on debt at a anchored absorption bulk will accept an advantage back bazaar absorption ante rise, admitting an bend that may be acting in nature. If a REIT's absorption bulk is fixed, the bazaar amount of that REIT’s liabilities will, in effect, decrease.
An admission in bazaar absorption ante is about apocalyptic of a deepening economy. Consequently, abounding REITs will curl due to greater demand.
When because an advance in a REIT during a alive absorption bulk climate, abundant factors charge be considered. For example, acreage development is added capital-intensive than acreage ownership. Therefore, an admission in absorption ante would accept a greater abrogating appulse on a REIT that relies on developments against a REIT managing absolute properties.
Furthermore, constraints on new accumulation acquired by college development costs, accompanying with added appeal consistent from a deepening economy, can admission control ante and hire growth, thereby accretion acreage values.
There accept been 16 periods back 1995 back absorption ante accept risen significantly. REIT allotment were absolute for 12 of those periods.
Nonetheless, accepted acumen can amplitude markets. I had a chat with a able advance administrator aural the aftermost month. He insisted that all REITs consistently ache due to bulk increases.
My position is that every REIT charge be evaluated alone during periods of bulk increases. Accepted acumen that runs adverse to abstracts can assignment to the advantage of a adeptness investor.
For a added attending into the alternation of REITs with bulk increases, see SA contributor Simply Safe Dividends' article: "Higher Absorption Ante Appulse REITs: What Allotment Investors Need To Know."
Omega projects adapted FFO per allotment of $3.42-3.44 for this budgetary year. This would be collapsed from aftermost year. At the end of Q2-17, Omega’s reportable FFO on a adulterated base was $151 million, or $0.73 per share, compared to $172 million, or $0.87 per share, for the additional division of 2016.
Omega Healthcare enjoys ample geographic diversification...
(Source: OHI broker presentation)
... as able-bodied as a well-diversified portfolio of operators.
(Source: OHI broker presentation)
Only 10% of leases expire above-mentioned to 2022...
(Source: OHI broker presentation)
... while approved hire increases are appointed into the operator’s leases.
The afterward minimum rents are due beneath OHI's costs leases for the butt of 2017 and the afterwards bristles years (in thousands):
Omega’s amateur net charter anatomy insulates the aggregation from abounding costs, as tenants are adapted to pay all absolute acreage taxes, architecture insurance, and maintenance.
It has a able antithesis breadth with no debt maturities until 2022. Variable bulk debt stands at beneath than 1x EBITDA. The aggregation has $1.1 billion in liquidity.
(Source: OHI broker presentation)
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OHI’s acclaim appraisement of BBB- is advance grade.
As the US citizenry ages, demographics serve as an astronomic tailwind.
OHI’s crop compared to that of aeon is robust...
... and the aggregation has added the allotment payout for 20 afterwards quarters.
(Source: Aloft two archive by Brad Thomas)
The company’s appraisal about to FFO is additionally attractive.
(Source: Broker Presentation)
Its history of accretion revenues is impressive.
I’ll let the aggregation agent allege for me:
“The 1 addressee that's $10 actor behind, actually the LCs and claimed guarantees aloft awning that, able-bodied beyond. So that's collectible.”
(Source: OHI Q2 2017 antithesis call)
In added words, the abettor has funds that OHI can appropriate, and those funds are added than awning the sum owed.
It is additionally appear that nine accessories operated by one of the disturbing operators has been purchased by an absolute Omega tenant.
Signature Chief Active is one of the operators in arrears. Signature and Omega are alive aggressively to absolute the damages, as is apparent by the afterward headlines:
Capital Chief Active of Dallas to access Signature Assisted Living's 12 chief communities
“Dallas-based Basic Chief Active Corp. said Monday it will access all of Signature Assisted Active of Texas' chief communities, accretion its backdrop in the accompaniment by about a third.”
“The transaction will add 12 assisted-living and memory-care backdrop to Basic Chief Living,”
Legend acquires bristles Texas facilities
“Wichita-based Legend Chief Active is accretion its Texas attendance with the accretion of bristles Signature Chief Active residences.”
To date, Omega has awash over two dozen of Signature's accessories in an advancing accomplishment to alleviate the situation.
The additional abettor in arrears is ARK. Omega's chief administration is on almanac as advertence that a worst-case book would aftereffect in OHI leasing the Ark backdrop to addition operator(s) at a accident of a penny a division in FFO. Not absolutely an Apocalypse Now scenario.
I accede that investors should be anxious about the two companies in question. However, two operators do not Omega’s portfolio make, no added than two investments comprise my banal portfolio.
I’ll readily accept that I did not investigate every abettor associated with Omega. I did, however, dig abysmal abundant to acquisition that some of the operators are flourishing.
Let us booty a attending at Maplewood Living, one of Omega’s ten bigger operators. Once again, some account and excerpts:
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Maplewood Chief Active And Omega Healthcare Investors To Celebrate Groundbreaking For Upper East Side Project
“Inspir | Manhattan, a avant-garde chief active community, will be a affluence 23-story, 212,000-square-foot high-rise featuring 215 units of assisted living, added affliction and anamnesis affliction residences. It will be the aboriginal ground-up activity of this calibration in the breadth in added than two decades.”
Potential $5 Billion Development Pipeline Planned for Maplewood’s Inspir Brand
“Within bristles years, Smith anticipates rolling out at atomic 10 added Inspir communities, and amid 20 and 40 barrio could be up aural 10 years - authoritative the Inspir cast decidedly beyond than the absoluteness of Maplewood today.”
“The timing is adapted to barrage this effort, Smith believes. In places like New York City, area developers face acutely aerial barriers to entry, chief apartment for years has not been credible as the “highest and best use of absolute estate,” he said. This has created an astute abridgement of supply. With demographic accouterment now occurring, the cachet quo has changed.”
Now let us about-face to Diversicare Healthcare Casework (NASDAQ:DVCR), addition affiliate of OHI’s top ten.
Diversicare currently runs 76 SNFs with over 8,500 beds in ten states. The aggregation has been in operation back 1989 and becoming its way assimilate the NASDAQ in 1994.
Since 2012, it has added revenues from $200 actor to $600 million. In that time span, EBITDA has added by a agency of 4.5x.
Over the accomplished three years, Diversicare has added revenues at a bulk of 20% per year. EBITDA has added at a 33% annualized rate.
It has angled in admeasurement over the accomplished three years and has a targeted advance bulk of 5-10 accessories per year. Back 2014, the cardinal of accessories the aggregation operates has developed from 45 to 86.
So there you accept it. Omega’s portfolio doesn’t abide of an array of wastrels almost eking out an existence.
OHI aloft the allotment a penny a division for twenty afterwards quarters. It has a declared allotment action to advance an adapted FFO payout arrangement beneath 85%.
OHI's allotment appears safe, with the allotment currently at 72.7% of AFFO. My acceptance is that in best scenarios, administration will abide to admission the allotment up to the 85% AFFO threshold.
I’ll readily accept that I was careful about advance in Omega afterwards acceptance the pros and cons I listed above. What follows accustomed me to advance in the aggregation with a amount of confidence.
The afterward branch is taken from Omega’s broker site, and it speaks volume:
“Through 2016, Omega ranked 2nd amid healthcare REITs with a 247.1% ten-year absolute actor acknowledgment and was 9th in absolute actor acknowledgment amid all REITs. Omega's ten-year absolute actor acknowledgment additionally outperformed the RMS (62.3%), S&P 500 (95.7%) and the DJIA (106.4%). It credible the seventh afterwards year in which Omega was in the top ten of all REITs in ten-year absolute actor return.”
It should additionally be acclaimed that the chief administration aggregation has an boilerplate administration of 16 years.
C. Taylor Pickett is the CEO and has served in that accommodation back June 2001. At the age of 55, he apparently has a few added years afore he passes the reins to his closing successor.
The accomplishment of this company’s administration aggregation agency a abundant accord to me. It additionally speaks volumes to attestant the affiliated of cabal affairs appear below.
(Data Source: Scottrade)
Insider buys of that consequence announce administration has abundant aplomb in Omega’s future. It is affiliated to a amateur in Texas Hold ‘em, blame all in on the turn... back he knows the river card!
In the Bulls' Retort section, I didn’t abode ACA alleviate or the anticipation of cuts in Medicare and Medicaid. In truth, I am absolutely anxious about both issues. The best way I can explain my ambiguity on the affair is with the afterward quote:
“I'm all in favor of the autonomous assumption that one idiot is as acceptable as one genius, but I draw the band back addition takes the abutting footfall and concludes that two idiots are bigger than one genius.”
- Leo Szilard
In added words, who knows what the admixture of idiots and geniuses (a absorption of the electorate) in Washington will do? I’d never accomplish any advance decisions if I absolutely advised the possibilities of differing government initiatives. I’d be bedridden with fear.
I own a baby position in OHI, which I purchased abreast the accepted level. I am of the acceptance that one will never buy a abundant aggregation in ache if the negatives are the alone bill befuddled assimilate the scale.
I advance in the shares of “distressed” companies on a adequately approved basis. By consistently purchasing almost baby positions, I accumulate my accident adequately low. The outperformers in this accumulation added than atone for my casual misstep. I abate the accident with a foundation of athletic corporations accouterment approved dividends.
Disclosure: I am/we are continued OHI.
I wrote this commodity myself, and it expresses my own opinions. I am not accepting advantage for it (other than from Seeking Alpha). I accept no business accord with any aggregation whose banal is mentioned in this article.
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Additional disclosure: Please conduct adapted due activity afore authoritative any investment. This commodity is not a advocacy to buy or advertise any stock.
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