Managing Risk Is What Separates The Best From The Rest
- A sound strategic analysis of a company’s quarterly earnings results is an important exercise.
- Many operators are feeling cash flow pressures and as a result, Omega has been forced to adapt to the evolving skilled nursing business model.
- I am pleased to see Omega’s management team managing risk and eventually I am confident that the market will distinguish between the best and the rest.
One of the most misunderstood value propositions for investing in REITs is that when you are a shareholder you are essentially employing the management team. That is, you are actually providing critical capital, as a shareholder, to fund acquisitions, redevelopment, and of course, pay the management team.
I think about that often, as part of the value creation process for any company is to generate shareholder returns by effectively managing risk. When I see management teams making strategic decisions by estimating the impact on reported earnings, I always try to measure against the expected incremental value of future cash flows.
Forecasting value is the weighted average for a range of scenarios and the sum of all of these results is ultimately the responsibility of the management team. A sound strategic analysis of a company’s quarterly earnings results is an important exercise and one that could provide investors with highly relevant data that could provide clarity into the future prospects of the company.
One of the well-known REITs in my coverage universe is Omega Healthcare Investors (OHI). I began covering this company in April 2012 and as illustrated below, shares have climbed as a high as $43.86 (1-20-15) to around $27.00 last March.
Clearly, the selling pressure on Omega shares is reflected in the enhanced risk seen in the skilled nursing marketplace. Many operators are feeling cash flow pressures and as a result, Omega has been forced to adapt to the evolving skilled nursing business model.
As I alluded earlier, managing risk is a critical part, if not the most essential part, of the investing process and I have become a more bullish investor of Omega shares due to the company’s effective capabilities for managing risk. As Howard Marks wrote,
Managing risk is what separates the best from the rest.”