As America Grows Older, So Does the Appeal of This Dividend REIT

As the U.S. population ages and demand for health care products and services grows, health care real estate investment trusts such as Omega Healthcare Investors are especially attractive. Many will benefit from this favorable demographic shift, while paying high yields to shareholders. Omega Healthcare Investors stock currently yields over 7% and the company should benefit from long-term growth tailwinds. As a real estate investment trust that is active in the long-term care industry primarily through skilled nursing and assisted living facilities, Omega has a portfolio primarily made up of triple-net lease properties. There are operated by a wide variety of health care companies, mostly in the U.S., but Omega has a small presence in the U.K. Omega generates about $900 million per year in revenue and trades with a market capitalization of $8.8 billion. It also sports an impressive 18-year dividend increase streak, which is the focus of this analysis. Omega reported first quarter earnings on May 4, and results came in better than expected on both the top and bottom lines, as the trust continues to see improvement from the pandemic. Omega suffered during the early stages of the pandemic as its tenants saw declining occupancy levels, which resulted in certain tenants being unable to pay any or all of their contracted base rent. But Omega weathered that tough period and has worked with certain tenants to remedy those problems, and with the Q1 report, the trust said it was seeing improving occupancy rates. That is helping to normalize its collected rent levels, but Omega did say that Q1 levels are still below the pre-COVID numbers. Still, the recovery is well underway, which is important for the dividend. Total revenue was $274 million in Q1, which is up from $264 million in the fourth quarter, and $253 million in last year's Q1, respectively. Expenses rose from $162 million in the year-ago period to $191 million, which crimped funds-from-operations growth. That came in at 85 cents per share on an adjusted basis, and was up from 79 cents in last year's Q1. Importantly, Omega noted that April, which was after the end of the first quarter, saw 99% of contractual rent collected, so it appears the trust is back on track in terms of returning to pre-COVID levels of revenue and earnings. Dividend Health Omega's dividend has been raised on a per-share basis for 18 consecutive years, making it one of the longer streaks in the world of REITs. This sector tends to be quite cyclical, so dividend increase streaks like Omega's can be somewhat difficult to come by. However, Omega has accomplished this through a combination of growing FFO-per-share and a prudent payout ratio. Omega's FFO-per-share growth rate has averaged 6% annually in the past decade, and while growth has been lumpy at times, the trust has expanded its earnings over time. That certainly helps with the dividend not only in terms of growth potential, but safety as well. After all, as the trust's FFO base expands, it is able to continue raising the payout year after year. Currently, the dividend of $2.68 per year is about 79% of projected FFO-per-share, and for a REIT, that is quite manageable. REITs are required to distribute substantially all of their earnings to shareholders, so payout ratios tend to be quite high for that reason. A payout ratio of ~80% is very manageable for Omega, and indeed, that level is where it has spent most of the past decade. We note that some cautious behavior from management following the COVID crisis has led the payout to be unchanged for the past seven quarters, but we fully expect Omega to continue its streak of dividend increases. The dividend has been raised at an average rate of 5.6% in the past decade, which is owed to the fact that it has continued to boost FFO, which has afforded it the ability to pay an ever-higher dividend to shareholders. We forecast 2% annual FFO-per-share growth moving forward from 2021's base level because expenses have risen, which crimps margins, and since Omega continues to issue common shares to fund acquisitions and property investments, the hurdle rate to achieve economic returns on those shares is always moving higher. Indeed, the trust filed to issue up to $1 billion in new common shares in late May in a bid to raise capital to invest. These shares dilute existing shareholders, make FFO-per-share growth more difficult because earnings are spread over more shares, and make the dividend more costly as the trust has to pay the dividend on a higher number of shares. We therefore think it is more prudent to be cautious on the trust's ability to generate FFO-per-share growth, but note that Omega should be able to comfortably cover its dividend under just about any circumstance. Finding the best stocks to own to generate income can be tricky given there are so many choices. However, starting with the best high-yielding stocks makes an investor's job easier, and we think Omega fits that description. The trust has a history of growing FFO over time, and its payout survived the Great Recession. It is leveraged to the ever-growing long-term care industry, and the stock yields an impressive 7.3% today, which is more than 5-times that of the S&P 500. Given this, and Omega's efforts to right the ship after a challenging 2020, we see the stock as a very strong dividend income choice.

As America Grows Older, So Does the Appeal of This Dividend REIT

Omega Healthcare offers a 7% yield and promise of growth.

Columnist Conversation

Tuesday Morning Fibocall for 6/15/2021

Tuesday on Real Money Pro

This Weekend on Real Money

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.