Omega Healthcare (OHI) - Hoya Hotseat

Great, thanks for having us. So we're Omega Healthcare Investors. We are a 10-plus-billion-dollar equity value REIT listed on the New York Stock Exchange. We predominantly invest in healthcare assets, primarily in skilled nursing and assisted living facility assets. We like the assisted living and skilled nursing facilities just given the demographics that exist, and ultimately we're able to capture fairly favorable yields relative to our cost of capital. So our strategy is to allocate capital to superior operators in the skilled nursing and assisted living facility space and grow with them, creatively growing FFO per share by effectively benefiting from the spread between our going-in yields and our cost of capital. Obviously those yields grow over time with escalators, so it's been a favorable and successful strategy for 20-plus years, and it's probably something we envision continuing to invest in while also continuing to examine other investment opportunities within the healthcare space.

We became a REIT in 1992, in March 1992. The company was founded very shortly thereafter, in August 1992 we went public with five employees, 39 properties, and $125 million of value in the real estate. We like the REIT structure because it aligns with the interests of our operators. Our operators didn't want to be hamstrung with owning their own real estate; there was a lot of value tied up in that real estate, and they liked the optionality of having an asset-light model. From their standpoint, they were looking to get into sale-leasebacks to realize some of this capital in order to grow, and so we made that partnership possible, and it continues to be the case today. The REIT structure obviously works very well for us as a triple-net; we're able to capture and pass on the vast majority of those returns to our shareholders in the form of dividends and reinvest some of that in the form of growth. During the last 30 years, we've been able to grow from 39 assets to around a thousand assets today, and the model is effectively very similar: we look to allocate capital to superior operators and grow with those superior operators, where they benefit from improvements and enhancements in the operating side of things, which obviously enhances the credit sitting behind our rents.

Sure. The long-term trends that benefit the sector are pretty much tied up with the baby boomer thesis. The most obvious one is the aging baby boomer demographic, which is highly favorable. Just to give you some context: between 1928 and 1940, there were about 2.5 million births a year; from 1941 to 1964, that jumped nearly 50% to 3.7 million births a year. We're just starting to get into the sweet spot of those baby boomers aging. The average age of our facility resident is around 80 years old, so that would put their birth rate at around 1945. We have effectively two more decades of this baby boom aging that will be hugely impactful to our operators. The benefit for us isn't in any enhanced rent capture, but it's an enhanced credit. It's a very low-margin, high-operating-leverage business, so to the extent that we're able to increase occupancy, or operators are able to increase occupancy, you see that improve their profitability and enhance our credit at the same time.

The other advantage is it's a regulated industry. Two things I'd say about a regulated industry: number one, you can't just put a shovel in the ground in most states; nearly all states have some level of restriction on new supply, so you've got this increasing demand with limited new supply opportunity. At the same time, as a regulated industry, it has some level of consistency over the funding because it's government funding. You've seen a really relatively consistent growth in that funding pattern over time, and it isn't impacted as significantly by the machinations of recessions and the consumer credit side of things. So it's a very steady business model that we look to continue to grow, and that's really effectively what we're looking to take advantage of over the next 20 years.

I think there are two kinds of bear theses we hear about. The first one I think is incorrect, and that's really that there's a stroke-of-the-pen risk. In fact, I think the pandemic demonstrated this: during the pandemic, the government, both federal and state, stepped up in quite a significant way to provide incremental funding to this industry, understanding that it was a too-big-to-fail industry. Therefore, the idea that you would have a stroke of the pen that would potentially endanger large portions of the aging and indigent population, particularly a sick population, strikes me as somewhat naive in terms of the likelihood of that actually occurring.

In terms of actual challenges, I don't think it's a risk per se; I actually think it's an opportunity. But the biggest challenge continues to be labor in this industry, and I don't think that's going to go away. You see cycles where during recessions things are actually quite favorable for this industry, but historically it's always been an industry that's been a little challenged. I think as a group, as an industry, we're starting to embrace technology a little bit more, and as Omega we're starting to actually invest in some of these technology platforms that we think can help our operators, be it for detection risk, remote patient monitoring, and the like, to make sure that we're using the personnel that we have on hand, or our operators are, to be most efficient in hitting the areas and the residents that need the most care at that point in time. I think if we could be more thoughtful about how we utilize that staff, then ultimately we will be able to mitigate a certain amount of the labor risks that continue to exist.

Maybe it's the English in me that I don't necessarily like to compare myself too much to my peers. I will tell you that I think my peers do a stellar job. What I think we are able to bring to the table, what I really like about our platform, is pretty much the diversification. We have over 80 operators, we're in 42 states, and we're obviously in two classes predominantly: skilled nursing and senior housing. We're also in the UK in a fairly decent size as well; we now have nearly $2 billion of assets in the UK. That diversification allows us to play offense and defense. On the defense side of things, we always say you don't get 10% yields without some risk, and that risk is obviously most relevant when an operator starts to struggle financially. When we have, like we do, two or three other operators in a state, the opportunity for us to transition challenged facilities to a new operator and capture the majority, if not the entirety, of the pre-transition rent is greatly enhanced when we have those relationships in place and we have master leases that we can put those facilities into. On the defense side, that diversification creates a level of ballast and consistency in our cash flows, which is very supportive. On the offense side of things, at the end of the day our job is to allocate capital, and if we have diversification of operators, if we have diversification of states, we're able to normally find a group that are looking to grow. Sometimes there are states that are a little more challenged, maybe they're pulling back, but at the same time, if we have 42 states plus the UK to grow in, we have a captive audience of operators who are looking to grow and allow us to allocate capital. I think from both an offense and a defense standpoint, the way our portfolio is structured allows us to consistently add value to shareholders through FFO per share growth irrespective of the backdrop within certain macro and micro environments.