What to do with Omega Health Care Investors?
Today I want to look at one of the companies in my Vrijheid Fonds. If you want to know which companies are part of my Vrijheid Fonds, take a look at my Portfolio page.
I will take a look at the company that has seen its stock price drop since the beginning of 2017. A REIT company that represents approx. 3.5% of my total Vrijheid Fonds. Lets take a look at the company that froze its dividend in February of 2018 and look what to do from now on. Lets take a look at Omega Healthcare Investors.
Omega Healthcare Investors
Omega is a real estate investment trust (REIT) that provides financing and capital primarily to skilled nursing facilities (SNFs). Omega is the largest SNF-focused REIT and generates 84% of its revenue from SNFs. Patients discharged from hospitals are sent to SNFs when they still require care or rehab before they can be sent home.
Last year the management of OHI revealed that one of its larger tenants, Orainna Health systems, was in trouble and that OHI placed this tenant on a cash basis after the operator continued missing its budget and failed to pay its monthly rent obligations.
Furthermore OHI management told the shareholders that in addition to Orianna, Signature – the company’s third-largest operator – was facing liquidity challenges to pay rent on a timely basis.
These two tenants (Orianna and Signature) accounted for almost 12% of annualized contractual rent. So these are some serious problems for shareholders. OHI management has been open about these problems and that is something shareholders appreciate.
OHI management took responsibility towards its shareholders and took action. In their Q3 report in 2017 OHI stated they have built a “very significant cushion” and remain “confident” in the company’s ability to pay quarterly dividends, which seems to be supported by the firm’s fundamentals.
The chain is broken
That was back in October 2017. In February 2018 OHI caused some clamor when they announced that is would continue its strategic repositioning and freeze its dividend for 2018. I wasn’t happy with this dividend freeze and it got me thinking about the problems OHI still has with a couple of tenants. More or continuing troubles could result into the worst-scenario for a DGI, a dividend cut. I would be really grumpy about that ;-(
After the news was broadcasted, the share price of OHI fell. I learned over the years as an investor, not to react on all news. So first I went back to the fundamentals of the company.
And if we look at the fundamentals of OHI, you can see that the payout ratio remains below 90% of adjusted funds from operations (AFFO). This payout ratio tells me that OHI retains a high amount of cash flow from which to fund its “cushion” (and hopefully a dividend hike in the future).
And when the problems with the major tenants are resolved, the payout ratio will further improve and OHI will be able to continue paying dividend, which by the way, they increased already for 22 consecutive quarters.
OHI has been in some troubled water for a couple of months. OHI management has been open about these problems from the beginning. They took appropriate measures to handle these problems. One of these actions was to freeze the dividend for the whole of 2018.
I’m not happy with this action, but I do understand it and see the necessity of it. For my share of OHI I have been taking a “wait and see” approach, because I think that at this moment the best thing to do is to do noting and see how management moves forward on the operator issues. In my humble opinion the management is highly experienced and has been straightforward with investors about its problems
While the dividend freeze is not nice, OHI should be able to maintain its dividend through 2018. And OHI’s healthy payout ratio, conservative balance sheet, and committed management team towards dividend, gives me some peace of mind.
Only if more operator problems will occur … And that is why I will keep a close eye on OHI.
Do you own shares of Omega Healthcare Investors? And what is your thought and action on the announced dividend freeze?
I like to hear from you!
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