Surf the Silver Tsunami With This High Yield REIT

Real estate investment trusts, or REITs, have broad appeal for income investors. REITs provide investors the ability to purchase a stake in real estate, without having to own physical properties. In addition, REITs widely offer much higher dividend yields than many other stocks. With a dividend yield of 7.0%, Omega Healthcare Investors towers above the average dividend-paying stock. The S&P 500 Index, on average, yields just ~2% right now. This makes Omega Healthcare an extremely attractive high-yield dividend stock. Omega Healthcare's dividend appears secure, as the company is well-positioned to capitalize on an emerging growth industry. As a result, OHI stock could be a top consideration for income investors considering REITs. Business Overview & Earnings Roundup Omega Healthcare is a REIT specializing in health care properties. As of the end of 2018, the company's portfolio consisted of 909 operating facilities. Over 80% of the company's portfolio is comprised of skilled nursing facilities, with the remainder consisting of senior housing. Omega is the largest skilled nursing facility-focused REIT. It operates facilities in the U.S. and the U.K. Omega operates under the triple-net structure, which is highly attractive for REITs. This allows Omega to generate steady rental income each month from its properties, while tenants are responsible for major expenses such as capital expenditures, taxes, and insurance. However, the past year has been unusually difficult for Omega, due to worsening performance at certain tenants. Two of its tenants, Orianna and Preferred Care, entered bankruptcy. Preferred Care was a relatively small tenant with annual contractual revenues of $3.2 million. But Orianna was Omega's fifth-largest tenant, with annual contractual revenues of $47.3 million. Omega said it resolved the sale and transition of legacy Orianna assets. In addition, the trust said a different operator, Daybreak, sought and received near-term liquidity relief of $2.5 million in rent deferral for the first two quarters of the year. Certainly, the number of tenants seeing significant financial woes is troubling, but the damage thus far is fairly limited and contained. Omega has stabilized its financial results in recent periods. Omega reported first-quarter earnings on May 7 and results were largely in line with expectations. Total revenue came in at $223.7 million, a fractional increase year over year. Omega kept tight controls on expenses, particularly given the challenging environment. Operating expenses came in at $101.5 million, most of which was depreciation and amortization. Funds from operations, or FFO, reached $144.1 million, or $0.67 per share. On a per-share basis, FFO declined 6% from the same quarter last year. A rising share count also negatively impacted FFO per share. On an adjusted basis, FFO per share declined 2.6%, a manageable decline. Omega's portfolio turnaround has succeeded, which is a huge positive for the company's FFO and its dividend. Surfing the Silver Tsunami The major growth catalyst for Omega Healthcare moving forward can be put simply: the aging population. In its most recent investor presentation, Omega described its future growth potential as surfing the silver tsunami. The basic thesis for an investment in Omega is that the company is optimally positioned to capitalize on the growing demand for healthcare properties over the next several years, thanks to the relative size of the older population. There were over 74 million baby boomers as of 2016. Omega has invested heavily in this trend, both organically and through acquisitions. On Jan. 2, Omega announced the acquisition of MedEquities for an enterprise value of $600 million, which it expects to close in the coming months. MedEquities is a self-managed REIT operating within the acute, post-acute and behavioral sectors of healthcare services. The deal significantly broadens Omega's portfolio, particularly in non-skilled nursing assets. The acquisition will bring nine new operators to Omega's portfolio, and is expected to increase annual FFO per share by $0.05 going forward. The environment is highly attractive for Omega over the long-term. The aging of the baby boomers is expected to drive a multi-decade increase in demand for skilled-nursing facilities. Increasing occupancy will be a major tailwind to Omega's growth and rental income. The economics of the industry are highly favorable, as increasing demand has been met with flat supply growth. According to Omega, there has been no new net supply of certified skilled nursing facilities or beds in the past 10 years. Furthermore, skilled nursing is a highly lucrative area. Investing in SNFs presents an average investment yield of 9.5%, with annual rent escalators of 2.5% per year or more. Attractive for High-Yield Investors Omega currently pays a quarterly dividend of $0.66 per share, representing an annual payout of $2.64 per share. Omega has not raised its dividend since January 2018, as it deals with the various challenges in its property portfolio. But the company has maintained its dividend, and dividend growth is not necessary with such a high yield of 7%. This makes Omega a highly appealing stock for income investors. Importantly, Omega's dividend appears to be secure. It is critical for investors to assess the sustainability of a dividend payout, and not be overly fixated on the yield alone. Many stocks with abnormally high dividend yields end up cutting their payouts if the underlying business fundamentals deteriorate. A sky-high dividend yield can often be a sign of danger, precipitated by a plunging share price which elevates the dividend yield. Fortunately, in this case Omega's dividend looks safe, as the company's turnaround has progressed. Omega is expected to generate FFO per share of $3.06 in 2019. With a dividend payout of $2.64 per share, Omega's forward dividend payout ratio is 86%. While this is high, investors should be accustomed to elevated payout ratios from REITs. As long as the company can continue to grow FFO, the dividend should remain secure. Therefore, Omega is a highly attractive stock for income investors looking for high yields.

Surf the Silver Tsunami With This High Yield REIT

The major growth catalyst for this REIT moving forward can be put simply: the aging population.

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