OHI Authorizes $500 Million Repurchase

See Below:

https://www.omegahealthcare.com/investor-relations/news-and-…

With its current $7.4 billion market cap, $500 million would be 6-7% of outstanding shares at current share prices.

This repurchase should lead to later dividend increases as there will be fewer shares to spread the taxable income over. Assuming taxable income increases at some point in the future.

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This is over 3 years and looks like contingent on them selling some assets. There is not much free cash flow after paying the dividend and when they sell properties, it is going to reduce the FCF, also, they have to pay down debt associated with the properties, (Even if they are not directly tied, still they have to maintain debt to EBITDA ratio’s).

I have seen similar announcements from REIT’s and hardly anyone follows through. This is jawboning the stock price. There is a reason why the dividend yield is 8%. I am yet to see one REIT come out and cut the dividend and declare we are going to use the cash saved by the dividend to buy back shares.

OHI is down 6% or $1.84. So management expected this and tried to jaw-bone the stock price by announcing $500M share buyback, which I doubt they are going to follow-through.

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And you can read managements’ minds?

This management team (CEO,CFO, & COO) all started at OHI in the second half of 2001. They are a known commodity. I have owned OHI off and on for 20 years and in that time the worst thing they did was to keep raising the dividend for a little too long.

Buying back shares is a more flexible way of returning cash to shareholders.

Unless they are leaving the company soon, they shouldn’t really care about short-term stock movements. The CFO and COO sold only about 45% of their stock awards last year. Some directors kept all their 500 share awards.

All 3 of the top execs are in their upper 50’s, so it is possible that they will retire soon, but I would give them 5 more years or so.

Why should they care about a few day’s movements in the stock. I don’t.

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And you can read managements’ minds?

Why should they care about a few day’s movements in the stock. I don’t.

Not sure what your point is. The buyback announcement is not about raising the share price temporarily, rather supporting share price. The management is trying to artificially create a floor under the stock price. The share price has to climb 56% to get back to pre-pandemic level. The stock is underperforming the market, REIT’s, and their sub-sector. In the same period the outstanding shares have increased by 8%. This buyback announcement is not really taking advantage of lower share price, but to jaw-bone, provide support to share price.

Do you think the management is not under pressure to shore up share price?

I am still leaving the possibility of the management monetizing some properties and paying down debt and still have some cash left to do buyback. But is it going to be $500 million worth of it? Let us see.

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“Do you think the management is not under pressure to shore up share price?”

No.

I think that you have read too many articles describing buybacks and buyback announcements as stock manipulations. They are more apt to be used as a means to enhance shareholder returns in the longer term by shrinking the share count as well as outside the REIT sector being a tax-efficent means of returning cash to shareholders.

I have owned OHI off and on for 20 years and in that time OHI’s management has had to react to lots of operator issues, as now, and they have generally done so fairly well. Better than their competitors.
Their only one mistake in my opinion was raising the dividend too much and for too long from 2015 and 2018, share repurchases is a logical solution to what I view as their previous error. Perfect sense to me.

We will see.

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I think that you have read too many articles describing buybacks and buyback announcements as stock manipulations

I am a big fan of buybacks. I have posted on their benefits extensively on many boards, even in WY thesis, I talked about how they have flexibility to do buyback.

I don’t see the cash for buyback here. Plain and simple. They are in catch-22, if they sell too much property, then they will hurt cashflow to sustain dividend, if they are not going to sell meaningful assets then they are not going to release sufficient cash to do the buyback.

Their announcement is very suspect. They announced buyback few days before earnings, so they know the earnings are not going to look good, and from the time they announced the buyback the stock is down 10%, and if you take into account the initial rise post buyback announcement, it is down by 14%.

The timing of their announcement, and lack of clear pathway for the buyback make me suspect.

Let us see how it plays out.

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Their announcement is very suspect. They announced buyback few days before earnings, so they know the earnings are not going to look good, and from the time they announced the buyback the stock is down 10%, and if you take into account the initial rise post buyback announcement, it is down by 14%.

Expanding on my earlier comments, the company announced as part of their results one of their operators Guardian (3.8% rent) has stopped paying rent. Clearly, they know this before announcing the buyback and market reaction to the news.

Now their dividend payout as FAD % is 92.5% (page 12 of their supplement). This is what I am talking about there is no way they can maintain dividend, sell property generate sufficient cash to buy back shares after paying down debt (either associated with the property or maintain debt levels).

It is amazing how many REIT’s push dividend so high (to unsustainable level) and think they can forever sell shares, to pay the dividend, and somehow they can pull this forever.

I have to add a criteria to filter out any company that pays more than 70% of FAD as dividends.

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The stock moved up 15%, the stock movement is bit buzzling, given that the results clearly demonstrated that they are not able to cover dividend. However, they did $133M share repurchase.

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Sold 2,500 shares of OHI this morning and have 1,000 shares remaining.

The biggest scary thing about OHI is that 31% of its operators are losing money. See bottom of page 6 at link below.

https://www.omegahealthcare.com/~/media/Files/O/Omega-Health…

Now where to put the sales procedes?

Checking account.

Probably not.

There is a very popular say, “More money has been lost in preparing for the next recession or bear market than from actual recessions or bear markets.”

Not saying that it is 100% true, but the odds are high that equities will outperform cash over the next 12 months.

I looked at two other retailers, TGT and DKS and TGT is out of consideration. Still digging deeper into DKS.

Might buy some more WMT. The odds that energy prices will decline over the next 12 months is better than 50/50, although each cycle is different. This time natgas is more global than before, the Feds have limited pipeline construction, and the smaller E&Ps that used to overdrill every time prices rose much are mostly gone.

Still odds are that energy prices will not rise much from here and likely fall. Could be wrong, but historically that is the pattern.

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There is a very popular say, “More money has been lost in preparing for the next recession or bear market than from actual recessions or bear markets.”

I use that all the time on another board. There are permabears, who are always preparing for the next recession.

That’s entirely different from when FED openly declares

  • we will raise interest rate until inflation comes down
  • We cannot do anything about supply so we are going to destruct demand
  • there is a wealth effect, and if we have to break the stock market, so be it

I want to preserve cash, because I am waiting for some great opportunities to emerge. I missed couple of them, specifically I was looking at UPST, it went $25 and I missed that day, and it is back above $50. There are going to be opportunities like that. I want to keep my cash for that.

On energy, recession will reduce energy consumption and bring the prices down is a general playbook. I am not sure how much energy consumption is going to come down, because energy consumption is still somewhat muted due to COVID and working from home. More companies are lifting working from home and people returning to work, will keep the demand humming and may not meaningfully reduce the consumption. It may come down but energy stock may end up doing okay.

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More money has been lost in preparing for the next recession or bear market than from actual recessions or bear markets.

Today Fed said…

https://www.cnbc.com/2022/05/19/fed-isnt-focused-on-impact-o…

“So it’s not aimed at the equity markets in particular, but I think it is one of the avenues through which tighter financial conditions will emerge.”

Ignoring what is said before but…Fed is saying tighter financial conditions will be achieved through stock market declines. Fed is prepared to crash the market, crash the economy, but determined to break the inflation.

I will be ready to buy when they change their tone. BTW, there is a saying don’t fight the FED. :slight_smile: