I am planning to make a purchase next week. Since I currently don't have any REIT exposure in my stock portfolio, I would like to add some using fresh capital. Especially considering the recent correction in stock prices due to worries about tapering and rising interest rates, this might be a good time to start a position.
Real Estate Investment Trusts
The REIT universe is quite but but I narrowed it down. I am considering two companies at the moment: Realty Income (O) and Omega Healthcare Investors (OHI). Although these companies are active in a different segment, their business is more or less the same.
Realty Income is an equity real estate investment trust (REIT). O is engaged in acquiring and owning freestanding retail and other properties that generate rental revenue under long-term lease agreements (primarily 10 to 20 years). Omega is also a REIT, investing in income-producing healthcare facilities, such as long-term care facilities located throughout the United States. OHI provides lease or mortgage financing to operators of skilled nursing facilities (SNFs) and, to assisted living facilities (ALFs), independent living facilities and rehabilitation and acute care facilities. The business model of both companies is to raise capital through debt and equity and to invest this money in real estate in their respective segments. Through long-term leases capital is returned to shareholders via dividends and hopefully capital gains.
Dividend comparison
In terms of dividend yield OHI wins. OHI currently yields 6.4% (paid quarterly), O yields 5.6% (paid monthly). OHI also shows a higher dividend growth rate. OHI's 5yr DGR is 8.9%, O's is only 3.2%. O's record of dividend payments (and regular increases) is longer than OHI. It seems that based on these metrics OHI is a better choice.
Valuation
But what about valuation? It is one thing to buy a great company, it's another one to buy these companies at good prices. How do O and OHI stack up against each other? A widely used metric for valuation purposes in the REIT sector is the adjusted funds from operations (AFFO) per share, relative to the stockprice. Based on the first three quarters in 2013, O's price/AFFO is 16.3x, OHI's is 13.3x. It seems OHI is cheaper than O. Although based on the 52-week high and low range, O has far more upside potential (+42%) than downside potential (6%) than O's (28% upside, 32% downside).
Whick stock to buy, O or OHI?
Both are obviously great companies and would do fine as part of my portfolio. What would you recommend me to buy? O, OHI, none or maybe some other company in the REIT sector? I am curious to hear from other DGI'ers if they think the time is right to add either one of these companies to their portfolio.
Whick stock to buy, O or OHI?
Both are obviously great companies and would do fine as part of my portfolio. What would you recommend me to buy? O, OHI, none or maybe some other company in the REIT sector? I am curious to hear from other DGI'ers if they think the time is right to add either one of these companies to their portfolio.
Both are great companies and eventually OHI will probably find it's way into my portfolio, but not right now. That's not for any specific reason, I just have other financial obligations as I'm going to have a long talk with my wife to see how she feels about picking up a rental property. I like O for their diversification and they're one of the longest tenured REITs out there with a long history of delivering great shareholder returns and growth of the company. It was the first REIT that I decided to purchase, mainly for the stability factor. And the monthly dividend sure does help out with the compounding. I went with HCP over OHI mainly because OHI isn't as diversified as HCP within the health care facility space. As far as timing, I personally would be trying to make smaller purchases of REITs because there could easily be more downside if the rate rise gets out of control and they rise too quickly. But what do I know, that's just my thoughts on it. Either one is a great company though and I'm sure you'll be pleased in the long run.
ReplyDeleteHi PIP, thanks for stopping by and taking the time to comment!
DeleteI am leaning towards OHI because of their higher dividend growth. I definately will keep O in mind for a next purchase in 2014. However, I will extend my analysis to include HCP and VTR in the comparison. As for the purchase size, I will use a normal sized batch of fresh capital (~ EUR 1.000 or $1.500). Smaller lots than this well run up purchase costs.
I've owned O in the past and currently own OHI.
ReplyDeleteO has had a nice pullback and is at its 10 year average P/FFO wise. I'm debating starting a new position with them but want to wait for 6% ($36). I may not get it but that is fine. Since REITs are non-qualified I want a higher yield.
OHI has held up quite well in the recent REIT pullback. I had been thinking of rolling OHI -> VTR. They have had a big pullback below their 20 P/FFO 10 year average and have an impressive 16% FFO growth rate. However they have a rather low REIT yield of 5%.vs OHI having 6.38% right now.
To answer your question.... O because of their management team.
Hello Pulling Myself Up, thanks for leaving your comment, it is highly appreciated! As I replied above, I will include VTR/HCP in the comparison as I am leaning towards OHI for this new purchase.
DeleteI totally agree with you that management is truely dedicated to returning money to shareholders. Their annual report clearly states this attitude. I will keep O in mind for next year!
BTW, I added you to my blogroll on the right. It's nice to read about someone with a similar sized portfolio. Good luck in 2014!
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