A 9% Yield and Growth Never Gets Old

Real estate investment trusts are prized by income investors, due to their high dividend yields. Investors can find high dividend yields of 5% or more across the board in the REIT space. These securities are also favored because they give investors the opportunity to profit from real estate, without having to purchase and manage property. At the same time, high dividend yields are typically accompanied by higher risk, and REITs are no different. Investors should analyze a REIT and its dividend sustainability before investing, particularly in a recession. Many REITs have cut or suspended their dividends since the start of 2020 due to the coronavirus pandemic. Omega Healthcare Investors has a high yield of 9%. Even better, the dividend appears secure, as OHI is a top healthcare REIT that is capitalizing on a major trend: the aging population. We believe OHI is an attractive stock for income investors. Business Overview Omega Healthcare Investors is a healthcare REIT that generates over 80% of its revenues from skilled nursing facilities, and the remainder of its revenues from senior housing developments. Omega has a market capitalization above $6 billion, making it the largest skilled nursing facility-focused REIT. As of the company's most recent investor presentation, Omega's portfolio included 959 facilities spread across 69 operators in 41 states and the U.K. OHI operates under the triple-net structure, which is highly attractive for REITs. This allows the company to generate steady rental income each month from its properties, while tenants are responsible for major expenses such as capital expenditures, taxes, and insurance. OHI also has a strong property portfolio, with an average lease term of 9.2 years and 94% of portfolio expirations set to occur after 2023. OHI recently reported third-quarter results, which showed resilience in the face of the coronavirus pandemic. Revenue excluding one-time items was roughly flat with the year-ago period, while the company generated growth in adjusted funds from operations (FFO). For the third quarter, adjusted FFO was $191.8 million, or $0.82 per share, compared with $172.5 million, or $0.76 per common share, for the same quarter in 2019. OHI collected over 99% of third-quarter contractual rent and mortgage payments (when excluding Daybreak). Changing Demographics Are a Tailwind Going forward, investors have the opportunity to benefit from a major demographic change -- the aging population. The U.S. has a large segment of aging people, particularly the Baby Boomer generation, which counts roughly 70 million among its ranks. Thousands of Baby Boomers retire every day in the U.S., meaning the sheer size of the aging population (along with rising health costs every year) will place a huge demand on healthcare products and services. OHI states that there will be a 44% increase in adults aged 65 and over in the next 20 years. By 2040, the 65+ age population will represent 22% of the population, up from 17% in 2020. Healthcare real estate, in particular skilled nursing, will see much higher demand in the years to come. According to OHI, there is a shortage of skilled nursing facilities, meaning this is a highly attractive area for investment. Strong demand and limited supply provide favorable economics and the opportunity for OHI to capitalize through annual rent escalators. Acquisitions have helped accelerate OHI's growth, such as the 2019 acquisition of MedEquities, a REIT that invests in healthcare properties and healthcare-related debt instruments. MedEquities focuses on acute, post-acute, and behavioral healthcare. The ~$600 million deal provided significant benefits for Omega, including accretion to FFO per share and diversification of Omega's portfolio with nine new operators. Dividend Analysis OHI currently pays an annualized dividend of $2.68 per share. With a recent share price of ~$29, OHI stock has a very high yield of 9.1%. When it comes to high-yield stocks, investors should focus on dividend coverage. Fortunately, OHI's dividend appears to be sufficiently covered. The company is expected to generate adjusted FFO of $3.13 per share in 2020, according to current analyst estimates. This equates to an expected payout ratio of 86% for the year. While this is a high payout ratio, investors should be accustomed to elevated payout ratios from REITs. REITs are required to distribute at least 90% of their taxable income to shareholders in exchange for a favorable tax structure. As long as the company can continue to grow FFO, the dividend should remain secure, even in a recession. The healthcare sector is much less cyclical during recessions than other sectors of the economy. During the Great Recession, Omega saw its FFO per share decrease only 3%. This allowed it to maintain its dividend during the financial crisis, giving the company an exceptional dividend growth record. Competitive advantages are difficult to come by for REITs, but Omega's focus on long-term care for the elderly is quite attractive given the number of people that will fall into this group in the coming years. It also has the size and scale to make periodic acquisitions to maintain its growth. OHI has increased its dividend for 17 years in a row, an impressive track record of steady dividend growth. And OHI's balance sheet is in decent shape. The company has an investment-grade credit rating, which helps keep its cost of capital low. The company also has no material maturities until 2022, and a manageable debt-to-pro-forma EBITDA ratio of 5.2x. Final Thoughts The stock market, as measured by the S&P 500, has come roaring back since the lows of 2020. The S&P 500 is now up for the year, a remarkable achievement considering the damage inflicted by the coronavirus pandemic. But the outlook for the U.S. economy remains highly uncertain. In this climate, investors should focus on dividend safety. While dividends are never guaranteed, particularly when it comes to high yield dividend stocks, it appears OHI's dividend is sustainable due to the company's strong property portfolio and cash flow generation. With a 9% yield, OHI is an attractive stock for income investors.

A 9% Yield and Growth Never Gets Old

This healthcare REIT is capitalizing on a major trend: the aging U.S. population.

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