The Long and Short
OHI bonds still offer impressive discount to peers
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Omega Healthcare Investors Inc. (OHI) long 10-year bonds appear attractively valued at current levels, as the OHI curve has more room to run in versus the Healthcare REITs segment. While expectations are that OHI will continue to trade at a discount given its position as the largest operator of skilled nursing facilities (SNFs) in the US—which are more susceptible to changes in government reimbursement via Medicaid/Medicare—there is room for bonds to tighten relative to peers. SNFs were granted additional government support during the heights of 2020’s pandemic related weakness, which helps mitigate ongoing risk related to Covid-19.
The OHI long 10-year bonds were issued as 12-year notes earlier this year. At a +174.5 g-spread and total yield north of 3%, the bonds represent one of the cheapest available in the broader REITs sector in the 10- to 12-year part of the curve (Exhibit 1).
Exhibit 1: OHI curve vs IG Healthcare REITs
Source: Amherst Pierpont, Bloomberg/TRACE Indications
Exhibit 2: OHI 2033s vs Broad IG REITs
Source: Amherst Pierpont, Bloomberg/TRACE Indications
OHI 3.25% 4/15/33 @ +182/10YR, G+174.5, 3.11%, $101.32
Issuer: Omega Healthcare Investors Inc. (OHI)
Amount outstanding: $700 million
OHI is the largest operator of skilled nursing facilities (SNFs) in the US. SNFs represent over 80% of all properties and are more susceptible to changes in government reimbursement via Medicaid/Medicare than other types of healthcare facilities. OHI is well diversified by geography and individual customer, with only one tenant (Ciena) representing over 10% of total rents. As of last year, the payer mix was 53% Medicaid, 36% Medicare and 12% Private.
SNFs were granted additional government support during the heights of 2020-2021 pandemic related weakness, which we believe helps mitigate ongoing risk related to Covid-19. Contractual rent collections remained in the 99% area at the height of the pandemic.
Occupancy dropped to 75.3% as of 2Q21. That is down from a peak of 83.6% as of 2Q20. Historically, OHI operates with a more typical run-rate in the low-80% area tracking back to 2016. While current rates are low, they do appear to be stabilizing in recent quarters.
In 2Q21, OHI reported funds from operation (FFO) per share of $0.74, falling slightly short of the $0.82 consensus estimate. Total revenue also fell short of expectations at $257.4 million versus the $273.0 million consensus estimate. Reported net income was $86.9 million or $0.36 per share. The company collected 99% of contractual rent and mortgage payments in the quarter. While occupancy remains down from pre-pandemic levels, facility occupancy improved on a sequential basis.
OHI boasts a solid liquidity profile with $100 million in cash on the balance sheet as of mid-year, plus $1.4 billion available on its revolving credit facility (thru 2025). Maturities are well laddered with just a $262 million loan maturity due next year, $350 million in debt maturities in 2023, and $400 million due in each 2024 and 2025. OHI has remained active in the public debt markets bringing new debt deals in longer-dated notes in each of the past three years to term out maturing debt.
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