Yahoo Finance CEO Interview: Omega Healthcare Investors' (NYSE:OHI) Taylor Pickett on Healthcare Industry, Covid, And More
As part of our ongoing mission to bring the most important news to investors globally, we recently interviewed the Omega Healthcare Investors’ (NYSE:OHI) CEO, Mr. Taylor Pickett. Omega Healthcare is a real estate investment trust that invests in the long-term healthcare industry, primarily in skilled nursing and assisted living facilities. Mr. Taylor Pickett has been the Chief Executive Officer of Omega Healthcare Investors Inc. since June 12, 2001.
We really appreciate Mr Pickett taking the time to answer our questions.
Simply Wall St: What sort of risks and rewards do investors face when investing in a healthcare REIT versus other types of REITs?
Taylor Pickett: Healthcare REITs invest in an array of different real estate including hospitals, medical office buildings, life science buildings, senior housing and skilled nursing facilities. There are different risks and rewards attached to each of them, including the yield on the initial investment, the growth of that yield, the risk around tenant rents and the additional capital expenditure required to maintain the viability of the real estate. Omega predominantly owns and invests in Skilled Nursing Facilities (“SNFs”). We like this asset class for a number of reasons including the increasing demand from the aging baby boomers, limited new supply due to licensing restrictions in most states, strong initial investment yields of around 9% and the non-discretionary, needs-based, low-cost nature of the service offering. We believe it provides a compelling risk-adjusted return, especially when incorporated into a diverse portfolio of operators and geographies.
SWS: What makes Omega Healthcare stand out amongst other healthcare REITs?
TP: I’m reluctant to answer this as there are a number of strong companies and quality management teams within the Healthcare REIT sector. However, I would highlight that we are the largest and most diversified SNF-focused healthcare REIT and that we’ve been able to grow earnings throughout the business cycle, leading to 17 straight years of dividend growth and strong total shareholder returns during that period.
SWS: What sort of returns do you target vis-a-vis the cost of capital, when making decisions around purchasing a new property or growing your assets?
TP: We look at a number of factors when making an investment. Our primary focus is on the operator. It is the cash flows of the operator that support our rent and therefore choosing a quality operator with a strong understanding of the industry and the market and an unwavering focus on patient care is paramount. While our rents are primarily based on the cash flow of the business, we will obviously analyze the sustainability of that cash flow as well as compare our investment to rebuild cost, to ensure there is asset support behind our investment. In terms of yield, we will normally look for an initial investment yield of 9 - 9.5% with annual rent escalators of around 2.5%. Our cost of capital is normally 200 – 300 bps below our initial investment yield, which leads to solid earnings accretion.
SWS: Your debt levels may appear elevated to some investors, judging by the debt-to-equity ratio of 118.4%. Given that more substantial borrowing is generally normal for REITs, how does the current interest rate environment affect your business?
Note for our readers: The questions were sent to the CEO before the latest financial data was released and therefore refers to the December 2019 debt-to-equity figure. The image on our platform has been updated to reflect the most recent figure.
TP: We look at our debt relative to our EBITDA, as EBITDA tends to be a more consistent metric than debt-to-equity, which is strongly impacted by our stock price on any given day. Our debt to EBITDA is currently around 5x, at the higher end of our target range of 4x – 5x but quite conservative when compared to most REITs. Given we are an owner and investor in real estate, interest rates can obviously be very impactful to our business and the current low interest rates are beneficial to our cost of capital. However, most of our debt is fixed rate with long, staggered duration and so we lessen the impact of short-term interest rate movements.
SWS: What is your overall growth strategy, and how do you plan to fund this, taking into account the current market environment?
TP: The current market is a bit of an anomaly as concerns around COVID-19 have resulted in a decline in our stock price and most of our operators are more focused on looking to protect their residents and provide high quality of care than they are on growing their business. However, we do believe this pandemic will be resolved in time and both we and our operators can pivot back to growth. Our future growth will likely look similar to the growth that has provided such compelling returns over time. We will look to invest in quality skilled nursing real estate operated by strong operators and will use our premium cost of capital to drive accretive per share growth for our shareholders.
SWS: What’s the most exciting thing about running your business?
TP: The fact that the healthcare industry is dynamic and no two days are ever the same. One day we could be working on funding a new therapy gym to help an operator better serve recuperating residents and the next day we could be structuring an acquisition or issuing debt or equity. As the CEO, I interact with many pivotal stakeholders who rely on me – employees, shareholders, bondholders, our board of directors and our tenants, to name but a few. The diverse nature of my role keeps it fresh and interesting.
SWS: Thank you for your time. It was great to learn more about your business and gather your insights. We’re sure our readers will appreciate it too.
The SWS editorial team had a great time putting together these questions for Mr. Pickett. Readers who would like to know more about the company can visit NYSE:OHI.
P.S: We are trialling company interviews for a limited time to gauge reader interest. If you are an executive or company representative and would like to organise an interview similar to this one, please contact us at editorial-team@simplywallst.com.
Our interview was conducted via email on May 9, 2020. Very minor grammatical corrections have been made to the text. Simply Wall St was not compensated for the production of this interview, and has no financial interest in any company mentioned. Company representatives are responsible for the answers provided to our questions.
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.
