Omega Healthcare Investors Inc: Can You Count on This 8.3% Yielder?
OHI Stock is Making a Comeback
The real estate business is known for producing a steady stream of rental income. But the stock prices of real estate companies are far from being stable. For instance, Omega Healthcare Investors Inc (NYSE:OHI) saw its share price plunging more than 20% for the most part of the past year, before starting to bounce back in recent months.
Now, OHI stock is enjoying a nice V-shaped recovery. Does that mean it’s time for income investors to warm up to the company? Let’s take a look.
The market seems to have a hard time putting a price tag on Omega Healthcare Investors Inc, but the company’s business is quite easy to understand. Headquartered in Hunt Valley, Maryland, OHI is a real estate investment trust (REIT) that specializes in healthcare properties. In particular, the company invests primarily in skilled nursing facilities and assisted living facilities.
Right now, Omega Healthcare Investors’ portfolio consists of 963 properties located in 41 states in the U.S. and the U.K. It is diversified across 70 different operators. (Source: “Map of Our Locations,” Omega Healthcare investors Inc, last accessed June 22, 2018.)
Note that the company rents out its properties through long triple net master leases. This means the tenants, rather than the landlord, are responsible for paying the property taxes, maintenance, and insurance on the leased properties. Moreover, Omega usually requires its tenant operators to put down security deposits of three to six months. And to stay up to date on their businesses, it also has monthly reporting requirements.
Moreover, because Omega Healthcare Investors is structured as a REIT, it must return a minimum of 90% of its profits to shareholders in the form of regular dividend payments. In return, it can avoid paying taxes on the corporate level.
Currently, the company has a quarterly dividend rate of $0.66 per share, which is usually paid on the 15th of each February, May, August, and November. Trading at $31.87 apiece, OHI stock offers a generous annual dividend yield of 8.3%.
In an era where the average S&P 500 company pays less than two percent, a yield higher than eight percent may seem too good to be true. And since OHI had a choppy ride over the past year, you might think that its dividend is in danger.
But that’s not really the case. As a matter of fact, Omega Healthcare Investors stands out when it comes to returning cash to investors.
You see, since 2003, the company’s dividends have only been increasing. In just the last five years alone, OHI stock’s quarterly dividend rate has grown by 32%. (Source: “Dividends,” Omega Healthcare Investors Inc, last accessed June 22, 2018.)
And if you are wondering whether the company’s current payout is sustainable, don’t worry; despite the volatility in its stock price, Omega Healthcare Investors has always backed its growing dividends with solid financials.
A Safe Income Stream
Last year, the company generated adjusted funds from operations (AFFO) of $683.0 million, or $3.30 per common share. Since OHI declared and paid total dividends of $2.54 per common share for the year, it has achieved a payout ratio of 77%. (Source: “Omega Announces Fourth Quarter 2017 Financial Results,” Omega Healthcare Investors Inc, February 13, 2018.)
In the first quarter of 2018, things were equally solid. Omega healthcare Investors earned AFFO of $161.3 million, or $0.78 per common share. Again, this easily covered its quarterly dividend payment of $0.66 per share. (Source: “Omega Announces First Quarter 2018 Financial Results; Continues Strategic Asset Repositioning,” Omega Healthcare Investors Inc, May 7, 2018.)
During the company’s first quarter earnings call, management confirmed their previous guidance. For full-year 2018, they expect Omega Healthcare Investors’ AFFO to come in between $2.96 and $3.06 per diluted share.
Right now, the company is on track to pay total dividends of $2.64 per share in full year 2018. If OHI achieves the midpoint of its guidance range, it would earn adjusted funds from operations of $3.01 per share for the entire year. And that would translate to a payout ratio of 87.7%, leaving a margin of safety.
The Bottom Line on Omega Healthcare Investors Inc
Don’t forget that Omega stands to benefit from a major demographic trend: population aging. Approximately 10,000 baby boomers turn 65 every day. As the population gets older, the demand for Omega’s senior housing properties and skilled nursing facilities could get a solid boost.
And as the company grows its business, it could also dish out bigger dividends.