High Yield Best Buy: Omega Healthcare or Medical Properties?

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Omega Health Investors (NYSE: IHO) and Medical Properties Trust (NYSE: MPW) are two high-yielding healthcare REITs. MPW stock price is down more than 50% year-to-date, while OHI stock price is actually slightly in the green this year:

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Data by Y-Charts

In this article, we compare them side by side and offer our take on the best buy right now.

Stock of medical properties Vs. Omega Healthcare stock: business model

Prior to the liquidation of MPW shares this year, MPW and OHI had generated very similar total returns over time. Even after MPW sold off this year, it has still significantly outperformed the broader REIT market (VNQ) over time:

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Data by Y-Charts

This is largely a result of MPW’s dominant scale in the hospital space, giving it access to more offerings and a better understanding of the industry than its competitors. She found many methods to generate alpha for shareholders. On top of that, he had access to plenty of trades and benefited from a stock price that generally traded at a premium to net asset value. As a result, he could issue cheap debt and combine it with equity raises at premiums to net asset value and reinvest the proceeds in buying new hospitals. This would then continue to grow NAV per share and cash flow per share while further diversifying the real estate portfolio, thereby optimizing the risk-reward ratio for shareholders. This strategy worked well and allowed the company to steadily increase its dividend at an attractive rate.

On top of that, MPW also has some of the best CPI-based rental escalators in the entire REIT space, giving it another source of growth in addition to its acquisition-based growth strategy.

The biggest risk that MPW currently faces is its exposure to several hospital operators – in particular Steward Health – which would face financial difficulties. If these companies end up filing for bankruptcy, there is always the possibility that the end result will be a reorganization of leases or even cancellation in some cases. This would undoubtedly result in a significant loss of revenue for MPW, making its business model a bit more risky at the moment.

OHI, on the other hand, has a well-diversified portfolio of skilled nursing facilities. While its tenants are also struggling a bit as a result of COVID-19 and a challenging demographic environment just before the wave of aging baby boomer money arrives, it benefits from conservative lease structures that are triple net in nature and over 9 years weighted. average times to expiration.

Accordingly, we here give the advantage to OHI given that its risks are less severe than those of MPW, which is largely reflected in its now superior long-term track record.

Stock of Medical Properties Vs. Omega Healthcare Stock: Review

MPW has a junk credit rating from S&P, although it is only one upgrade away from achieving an investment grade (BB+) credit rating. Notably, its rating outlook is also classified as stable, which – given all the short attacks on the company and the fall in its share price – is perhaps a little surprising, if not reassuring to investors. Moody’s assigns it an equivalent credit rating of Ba1 (Not on Watch) and said the following on the status of MPW:

[MPW’s] rating reflects the REIT’s conservative capital structure, unencumbered assets and track record of stable operating performance. The rating also takes into account MPW’s large scale and geographic diversification, with approximately 60% of pro forma assets invested in the US, 20% in the UK and 20% in other countries. MPW also maintains some diversity of property types with its investments in general acute care hospitals, inpatient rehabilitation facilities and behavioral health hospitals which each serve different patient populations and have different reimbursement mechanisms.

Credit issues include MPW’s aggressive acquisition strategy which sometimes results in temporary increases in leverage. But we believe the REIT remains committed to maintaining a strong capital structure and solid liquidity while continuing to achieve its growth objectives. MPW also maintains a high tenant concentration with Steward Health Care, although this exposure has diminished and we expect it to continue to do so given the REIT’s growth trajectory.

As of this summer, Steward Health hospitals accounted for 28% of MPW’s adjusted revenue and – as we’ve already mentioned – could cause problems for the REIT if they get to the point of declaring bankruptcy and are unable to pay their leases. Although MPW insists that its properties are of high quality and profitable on an asset level, it could still take them some time for all of these properties to be released on favorable terms. In the meantime, their debt ratio would swell and their dividend would probably have to be reduced or even eliminated. Again, while we don’t see any major risk of financial distress for MPW at this time, it is certainly not a low risk investment.

OHI, on the other hand, has a BBB- credit rating, which puts it in investment grade, although only one level above MPW. OHI has ample liquidity (~$1 billion) and a very stable cash flow profile given that ~97% of its revenue comes from long-term triple net leases.

Overall, OHI is the clear winner here given that it has a superior credit rating and its tenant risk is not as high as MPW’s.

Medical Properties Stock Vs. Omega Healthcare Stock: Growth Prospects

MPW has better growth prospects and also looks more palatable organically, thanks to its CPI-linked rent escalations. That said, both companies issue equity to fund much of their inorganic growth investments and neither has an attractive cost of capital at the moment due to soaring interest rates and the recent sell-offs of both. shares. Analysts expect MPW to increase AFFO per share by 6.1% in 2022 and 5.5% in 2023 and its dividend per share by 3.6% in 2022 and 5.4% in 2023 .

Analysts expect OHI to grow its AFFO and FFO per share at a CAGR of around 3% over the next four years. We believe this is reasonable as OHI faces increasingly tight EBITDARM and EBITDAR coverage ratios. This is largely the product of reduced Medicare reimbursement rates, rising wages and other inflation-induced cost pressures, and temporarily lower occupancy rates due to the COVID-19 and current demographics.

However, OHI should be able to weather these headwinds in the coming years with an expected growth in the over 65 population of over 16% between 2020 and 2025. skilled nursing facilities such as the properties owned by OHI, resulting in growth in the company’s cash flow. Another major boost for the company is that it doesn’t face any major lease expirations before this elderly population boom kicks in, so it shouldn’t suffer from too many downside catalysts. , assuming its tenants can continue to pay rent until then.

Overall, while MPW’s business model has traditionally been more dynamic, OHI has better risk-adjusted growth prospects given the major uncertainties and headwinds that MPW is currently facing.

Stock of medical properties Vs. Omega Healthcare stock: evaluation

While the IHO looks fairly valued at the moment (its metrics are slightly below five-year averages, but interest rates are also at the higher end of what they have been for the last half- decade), MPW looks incredibly cheap on all measures:

IHO MPW
Dividend yield 8.85% 10.68%
Dividend yield (average over 5 years) 8.17% 6.12%
EV/EBITDA 13.02x 11.70x
EV/EBITDA (average over 5 years) 13.39x 14.47x
P/NAV 1.11x 0.58x
P/NAV (average over 5 years) 1.27x 1.15x
P/FFO 10.03x 6.02x
P/FFO (average over 5 years) 10.64x 11.25x
P/AFFO 10.42x 7.63x
P/AFFO (average over 5 years) 11.43x 13.89x

As a result, MPW is definitely the best choice for high value investors. If MPW can navigate through the risks facing its tenants and continue to collect rents from its properties for years to come, investors will enjoy huge total returns through a combination of a current double-digit yield, d solid growth and a potential doubling of the Multiple P/NAV.

Through 2026, assuming no growth (as some vacancies and rent concessions due to early tenant issues are roughly offset by rent growth and new acquisitions) and that P/NAV returns to 1x (which is still well below its five-year average of 1.15x), MPW will generate an impressive total return CAGR of around 30%.

OHI, meanwhile, assuming a stable P/NAV multiple and an intrinsic value growth rate of 3% per share along with a stable dividend payout will yield a total return CAGR of 11.85% through 2026. While nowhere near as impressive as MPW’s total return potential, it’s still certainly high enough to warrant the OHI rating of a buy.

Key takeaway for investors

Overall, OHI and MPW appear to be attractive high yield options for investors seeking income from healthcare real estate. With the economy on the brink of recession, many investors like to increase their exposure to more defensive sectors like healthcare, so this is also something to consider when evaluating these two REITs.

That said, neither is without risk and MPW in particular could face significant challenges in the coming years if the shorts are right. In the end, it all comes down to investors’ tolerance for risk. For investors with a moderate risk profile, OHI is probably the best choice given that it has a superior credit rating and a high yield with moderate growth prospects.

For investors with a high risk profile who want to be more aggressive, MPW seems like a great fit. While the significant downside potential should be considered when sizing a position, the double-digit dividend yield and steep net asset value discount make MPW an enticing total return opportunity for investors looking to hit a home run. Perhaps the most important bullish indicators for this stock right now are the fact that management recently increased the dividend and that the company sold several properties occupied by some of its most distressed tenants (including Steward Health) at cap rates that imply the stock is deeply undervalued. We rate MPW as a high risk speculative buy and OHI as a medium risk buy.

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