Omega Healthcare Investors Inc (NYSE:OHI) is a real estate investment trust (REIT) with a high dividend yield over 6%.
The company operates in the healthcare sector, which is generally one of the best stock sectors for dividend income because of its essential products and services.
However, a high dividend yield can be a signal that a company’s dividend payment will not be sustainable.
During the last three months of 2015, the number of funds long Omega Healthcare Investors (among those tracked by Insider Monkey) slid to nine from 14, while the total value of their positions slid to $18.57 million from $62.36 million. In this way, the smart money investors from the Insider Monkey database amassed 0.30% of the company’s stock heading into 2016. More specifically, the largest shareholder in the list was Matthew Tewksbury’s Stevens Capital Management, which boosted its stake by 84% to 129,665 shares, followed by Jeffrey Furber’s AEW Capital Management, which increased its exposure by 11% on the quarter to 109,500 shares.
We will only invest in safe dividend stocks for our Conservative Retirees dividend portfolio, so let’s see if Omega can make the cut.
Business Overview
Omega Healthcare Investors Inc (NYSE:OHI) is a healthcare REIT that provides financing and capital primarily to skilled nursing facilities (SNFs), which account for about 90% of the company’s facilities. The remaining 10% of Omega’s facilities are used for senior housing.
Patients discharged from hospitals are sent to SNFs when they still require care or rehab before they can be sent home. Compared to hospitals, SNFs can provide short-term care on a much more affordable basis to save healthcare costs.
Omega’s tenants receive revenues through Medicare and Medicaid reimbursements as well as private pay for their services. Omega receives fixed rent payments from its tenants with annual escalators and uses triple net lease agreements, which are generally thought to be lower risk deals because they require the tenant to pay property taxes, insurance, and maintenance expenses.
Overall, Omega has more than 930 properties located across over 40 states and operated by more than 80 different operators. The company owns about 84% of its assets with mortgages (9%) and direct financing leases (7%) accounting for the remainder.
Business Analysis
Omega is the largest skilled nursing facilities REIT with more than twice as many properties as its next largest competitor and is playing the role of consolidator in this large and fragmented market.
The company boosted its property count by nearly 50% with its $3.9 billion acquisition of Aviv on April 1, 2015, which helped Omega gain operating, growth and cost of capital efficiencies.
Importantly, the deal also increased Omega’s diversification by state and operator. Unlike HCP, another healthcare REIT that we analyzed earlier, Omega’s largest tenant accounts for less than 7% of rent, and no state accounts for more than 11% of its total rent.
This diversification prevents the company from being overly exposed to unexpected headwinds that could emerge at any given tenant or in any particular state as it relates to issues such as Medicaid reimbursement.
While the skilled nursing industry certainly has its share of risks (more on that later), there are several elements of it that attract us.
Most notably, we continue to believe that the industry’s supply and demand fundamentals remain attractive.
From a demand standpoint, Omega’s occupancy rate has consistently remained in excess of 80% thanks to the non-discretionary nature of its operators’ services, and demand should rise as the senior population continues growing.
SNFs also seem likely to remain the go-to sites for post-acute care. Simply put, SNFs remain the most cost-effective environment for rehab services in most cases due to their relatively smaller footprints and lower staff counts.
As seen below, SNFs have about 50% market share of patients sent to post-acute care.
Source: Omega Investor Presentation
