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Omega Healthcare (OHI) to Post Q4 Earnings: What's in Store?

Zacks Equity Research

Omega Healthcare Investors, Inc. OHI is slated to report fourth-quarter and full-year 2018 results on Feb 11, after the market closes. Though the company’s performance will likely reflect a year-over-year decline in funds from operations (FFO) per share, its top-line results are anticipated to display marginal growth.

In the last reported quarter, this real estate investment trust, which invests in the long-term healthcare industry, delivered a positive surprise of 1.32%, in terms of adjusted FFO per share. Results reflected year-over-year growth in operating revenues for the Jul-Sep quarter.

The company is a decent performer, having beaten the Zacks consensus Estimate in each of the trailing four quarters, with average positive surprise of 2.31%. This is depicted in the graph below.

Omega Healthcare Investors, Inc. Price and EPS Surprise

Omega Healthcare Investors, Inc. Price and EPS Surprise | Omega Healthcare Investors, Inc. Quote

For full-year 2018, the company expects adjusted FFO per share of $3.03-$3.06. The Zacks Consensus Estimate for the same is currently pinned at $3.06.

Let’s see how things are shaping up, prior to this announcement.

Factors to Consider

Omega Healthcare, which invests in the long-term healthcare industry, mainly in skilled nursing (SNF) and assisted living facilities, has emerged as a leading SNF-focused REIT, and achieved diversification in terms of geography and operator in the United States and the U.K. The company’s properties are operated by a diverse group of healthcare companies, mainly in a triple-net lease structure.

Further, Omega is targeting accretive buyouts in 2019, after closing most asset sales and repositioning in 2018. In fact, during the later half of 2018, the company continued to make efforts toward transition of its legacy Orianna facilities to current operators with good rent coverage. The company remained focused on making solid progress with the sale and/or transition of the remaining legacy Orianna facilities in the quarter under review. Such strategic disposition program offers solid scope for capital redeployment in its growth endeavors.

Therefore, although any robust improvement in top-line might remain elusive in the near term, but strategic asset repositioning, along with further capital investment, will help enhance its operating performance over the long term.

In addition, though the SNF industry had been plagued with challenges, like lower occupancy and shorter average length of stay, in the past, recent trends display signs of stabilization and might continue in the to-be-reported quarter.

It also enjoyed significant liquidity with $920 million of cash and credit facility availability, as of Oct 31, 2018, while its debt maturities are well laddered. Decent financial flexibility will also likely aid Omega’s growth efforts. The company’s entire $10 billion+ of assets are unencumbered.

In fact, the Zacks Consensus Estimate for rental income of $193 million reflects a marginal increase from the quarter-ago figure of $192 million. Mortgage interest income is expected to remain unchanged, compared with the prior quarter, at $18.4 million. Also, the estimate for fourth-quarter revenues of $223.2 million underscores a marginal rise of nearly 0.9% year over year.

However, the company projects its G&A expenses for fourth-quarter 2018 to be consistent with or marginally greater than its third-quarter tally. This is due to continued legal expenses associated with operator workouts and transitions.

Nevertheless, rising interest rates is expected to have raised the cost of debt, which, in turn, may have affected the company’s profitability during the Oct-Dec quarter.

Omega Healthcare’s activities during the quarter gained analyst confidence to some extent. Consequently, the Zacks Consensus Estimate for fourth-quarter 2018 FFO per share moved up a cent to 77 cents in two months’ time. However, it indicates a 2.5% year-over-year decline.

Here is what our quantitative model predicts:

Omega Healthcare does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Omega Healthcare’s Earnings ESP is 0.00%.

Zacks Rank: Omega Healthcare has a Zacks Rank of 2 (Buy), which increases the predictive power of ESP. However, we also need a positive ESP to be confident of a positive surprise.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Hersha Hospitality Trust HT, scheduled to release earnings on Feb 25, has an Earnings ESP of +1.21% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CyrusOne Inc. CONE, slated to release fourth-quarter results on Feb 20, has an Earnings ESP of +3.07% and a Zacks Rank of 3.

Federal Realty Investment Trust FRT, set to report quarterly numbers on Feb 13, has an Earnings ESP of +1.53% and carries a Zacks Rank #3.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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