Wells Fargo: Omega Healthcare Fairly Valued At Current Levels, Further Dividend Raises 'Unlikely' In 2018

Following its meeting with management of Omega Healthcare Investors Inc OHI, Wells Fargo came away with its optimism tempered.

The Analyst

Todd Stender downgraded Omega Healthcare from Outperform to Market Perform and maintained his $22 price target.

The Thesis

Omega Healthcare's fundamentals, including its rent coverage ratios and census, are favorable, as overall portfolio quality benefits from "operator swap-outs and asset sales," Stender said in a note. The analyst believes these positives are already discounted by shares, which he said are "fairly valued" at current levels.

Stender maintained his price target, derived on the assumption interest rates will be slowly raised over the "hold" period.

The analyst said the management indicated at the REITWeek three weeks ago that quarterly earnings over the near-to-intermediate term will be impacted by the dilutive impact of asset sales, as rents taper off and the proceeds are redeployed.

This, Stender said, is likely to create some headline volatility in shares, given the likelihood that dividend coverage is weakened, as the AFFO payout ratio remains at or above 100 percent.

The company suggested following its last dividend raise in January that further raises are unlikely for the remainder of the year.

"We believe the dividend to be covered, though do not believe the total return prospects justify our strongest rating now that the shares have reached our valuation target of $32/shr," the note read.

Price Action

Omega Healthcare shares have gained about 22 percent in the year-to-date period, trading around $31.26 at time of publication.

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