Summary
- I recommended moving to the sidelines on Omega Healthcare back in November; I continue to believe price per share growth will be tough from here.
- Given management knows this is trading over NAV, it is not too surprising to see them utilize mostly stock to buy MedEquities.
- I think the deal looks fair, and the REIT likely hits their $0.05/share FFO target. That doesn't mean it's necessarily compelling.
- This idea was discussed in more depth with members of my private investing community, Industrial Insights. Start your free trial today ยป
Back in November, I publicly cautioned that the share price at Omega Healthcare (OHI) was starting to get it ahead of itself. Was that the right call? Perhaps, not in the short term, but I'm still extremely skeptical of the value here. As an investor focused on net asset value ("NAV"), the fact that the firm traded - and still does trade - at a premium to its liquidation value is concerning to me. In fact, it is one of the most expensive REITs in the market in this regard. I've also had long-running concerns on dividend sustainability heading into 2019 and felt that a secondary offering was on the table to clean up the balance sheet would not be off the table.
Issuing shares, at least with where the dividend sits today, would be dilutive to coverage if used to reduce debt. With dividend coverage weak, that just was not palatable. What's the next best thing? Some equity-funded deal-making. The January purchase announcement of MedEquities Realty Trust (MRT) for $600mm is a clever way of raising capital via equity: more than 80% of overall deal consideration is made up of common stock issuance. Even given that, management still guided that this would be accretive to funds from operations ("FFO") by $0.05/share. No problems, right? The leadership team has this under control.
