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Investing In Omega Healthcare Investors, Inc. (NYSE:OHI): What You Need To Know

Simply Wall St

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Omega Healthcare Investors, Inc. is a US$8.2b mid-cap, real estate investment trust (REIT) based in Hunt Valley, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how OHI’s business operates and also how we should analyse its stock. In this commentary, I'll take you through some of the things I look at when assessing OHI.

View our latest analysis for Omega Healthcare Investors

A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT's main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much OHI actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For OHI, its FFO of US$499m makes up 58% of its gross profit, which means the majority of its earnings are high-quality and recurring.

NYSE:OHI Historical Debt, July 2nd 2019

In order to understand whether OHI has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take OHI to pay off its debt using its income from its main business activities, and gives us an insight into OHI’s ability to service its borrowings. With a ratio of 11%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take OHI 9 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

I also look at OHI's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 2.48x, OHI is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

I also use FFO to look at OHI's valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. OHI's price-to-FFO is 16.29x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.

Next Steps:

In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Omega Healthcare Investors can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:

  1. Future Outlook: What are well-informed industry analysts predicting for OHI’s future growth? Take a look at our free research report of analyst consensus for OHI’s outlook.
  2. Valuation: What is OHI worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether OHI is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.