Description
OHI is a nursing home REIT turnaround. I have owned the preferreds for over 2 years (+150%); I feel it's time to buy the common. OHI has delevered since 12/31/00, reducing net debt 443m to 254m.
NEGATIVES
-Nursing homes are a terrible business. As a landlord/lender OHI is one step removed but still dependent on Medicare/Medicaid reimbursements in a time of governmental fiscal distress.
-OHI operators continue to struggle, most have filed Chapter 11 in the last few years (some more than once!!).
-Preferred dividends, suspended for 2.5 years, are ahead of the common.
-OHI is effectively controlled by the Preferred C holder (Explorer).
-A credit facility with 112m outstanding matures on 12/31/03. Another 65m facility matures in 6/05. OHI is negotiating to refinance both.
CAPITAL STRUCTURE (from 5/8/03 conf call)
Debt 289
Cash 35
Prfd 212 (105m convertible to common at 6.25)
Prfd div 50
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TEV 642
VALUATION
REITs trade off FFO (roughly net income plus depreciation). OHI reported 0.25 diluted in 1Q03, but the annual run rate is more like 0.80. At a little over 4x FFO there's no question OHI is cheap, but that's been true for years. The difference now is with reduced leverage OHI is cheap AND safe.
I estimate 2003 EBITDA at 75m and interest at 20m, the 3.75x coverage ratio is safe by REIT standards. After 20m preferred dividend accrual the remaining 35m of EBITDA benefits the common. Maintenance capex is near-zero due to lease structure, so FCF yield exceeds 25%.
TEV/EBITDA is not terribly cheap at 8.5x, but this is a leverage play. The large preferred position gives the common leverage without the bankruptcy risk.
OHI is not a candidate for Warren Buffett's favorite holding period. If things go well FFO will move up toward 1.00 and OHI will trade around 8.00. Otherwise OHI will trade in a 2.50-5.00 range. I recommend a half position at today's prices and averaging down if/when some piece of bad news drives the price closer to 2.50.
Catalyst
Credit line refinancing (probably by summer). I expect them to bring the preferreds current at the same time. An Explorer-led buyout is also possible.