8%-Yield Omega Healthcare Investors Stock Has More Room to Run
November 6, 2023
Here’s Why OHI Stock Is Able to Pay Stable Dividends
Omega Healthcare Investors Inc (NYSE:OHI) is a triple-net equity real estate investment trust (REIT) that owns senior care, skilled nursing, and assisted living facilities.
The largest skilled nursing facility (SNF)-focused REIT, Omega Healthcare has a $10.3-billion real estate portfolio that includes 893 properties in 42 U.S. states and the U.K. (Source: “Investor Presentation: September 2023,” Omega Healthcare Investors Inc, last accessed November 1, 2023.)
The company’s 66 operators (tenants) are responsible for 88,322 health-care beds.
While Omega Healthcare is a great company, health care wasn’t the best industry to be in during the COVID-19 pandemic. The industry, especially nursing homes and care facilities, took a hit in 2020, and Omega was no exception.
Health-care facilities and nursing homes across the U.S. experienced a surge in COVID-19 cases in the spring of 2020 and a bigger surge in the fall of that year. As a result, the operators of facilities owned by Omega Healthcare Investors Inc implemented new and evolving protocols to limit the spread of COVID-19. Still, between February 2020 and January 2021, the occupancy rates at those facilities declined by about 13%.
Moreover, those facilities’ expenses increased by as much as $45.00 per patient day from January 2020, due to staffing and personal protective equipment (PPE) costs.
The lower occupancy rates and higher expenses resulted in Omega Healthcare Investors Inc’s operators not being able to meet their rent obligations.
Many of the company’s operators continue to struggle with the impact of COVID-19 on their expenses and occupancy rates. Their expenses have eased since the dark days of the pandemic, but they’re still above their January 2020 levels. On the plus side, their occupancy rates have increased by about eight percent from their low in January 2021.
Omega Healthcare Investors Inc has implemented restructuring plans with some of its operators. This helped it collect about 94% of its contractual rent and mortgage payments during the second quarter. The company continues to work toward resolving outstanding issues with its operators.
Q2 Results Topped Management’s Guidance
For the second quarter ended June 30, Omega Healthcare announced that its revenues increased by 2.2% year-over-year to $250.1 million. Its net income in the quarter was $62.0 million, or $0.25 per share, compared to $92.0 million, or $0.38 per share, in the same period of last year. (Source: “Omega Reports Second Quarter 2023 Results and Recent Developments,” Omega Healthcare Investors Inc, August 2, 2023.)
For the second quarter, the company’s adjusted funds from operations (AFFO) came in at $183.0 million, or $0.74 per common share. That’s compared to $185.0 million, or $0.76 per common share, for the same quarter of 2022.
Omega Healthcare Investors Inc’s second-quarter funds available for distribution (FAD) were $173.0 million, or $0.70 per common share, compared to $172.0 million, or $0.71 per common share, in the same period of 2022.
During the second quarter of 2023, the company:
- Completed $129.0 million worth of real estate acquisitions
- Invested $124.0 million in real estate loans and other loans and investments
- Funded $17.0 million worth of capital renovations and ongoing construction projects
- Sold 10 facilities for $45.0 million in cash, generating a $12.0-million gain
- Repaid $350.0 million worth of senior unsecured notes that were due August 1
Commenting on the results, Taylor Pickett, Omega Healthcare Investors Inc’s CEO, said, “Our second quarter financial performance exceeded our expectations.” (Source: Ibid.)
Pickett continued, “While we had expected a strong sequential improvement in FAD, as some restructured operators returned to paying rent, this was augmented by unanticipated additional rent payments from some operators on a cash-basis.”
Recent Investments, Acquisitions, & Other Developments
Omega Healthcare Investors Inc restructured its agreements with a number of its operators to help them get through the pandemic.
During the fourth quarter of 2022, the company agreed to allow Healthcare Homes Limited, a U.K.-based company, to defer $8.2 million of its contractual rent from January 2023 through April 2023. Healthcare Homes resumed paying its full contractual rent in May. (Source: Ibid.)
In the first quarter of 2023, Omega Healthcare Investors Inc allowed LaVie to defer up to $19.1 million (66% of its contractual rent) from January 2023 through April 2023. During the second quarter, LaVie paid $16.9 million of its rent in accordance with its restructuring terms. In July, LaVie paid $2.5 million of its rent.
Omega Healthcare expects that LaVie will continue to pay $2.5 million per month until the additional restructuring activities are completed.
Also in the first quarter of 2023, Omega Healthcare entered a restructuring agreement with Agemo. This operator resumed paying rent and interest during the second quarter.
In April, Omega Healthcare Investors Inc acquired four SNFs in West Virginia for $114.8 million and leased them to one of its existing operators. The four facilities were added to the master lease of the operator with an initial annual cash yield of 9.5% and annual escalators of 2.5%.
Concurrent with the acquisition, Omega Healthcare loaned an additional $104.6 million to the operator, primarily for the operator’s purchase of 13 SNFs in West Virginia. The loans to this operator have a yield of 12%.
In May, Omega Healthcare Investors Inc acquired one SNF in West Virginia for $13.7 million and leased it to one of its existing operators. This SNF was added to the operator’s master lease with an initial annual cash yield of 10% and annual escalators of 2.5%.
In June, the company entered a $10.0-million mezzanine loan with one of its existing operators. This loan bears interest at a fixed rate of 11% per annum and matures on June 30, 2028.
Omega Healthcare Investors Stock Pays Quarterly Dividends of $0.67/Share
Omega Healthcare Investors Inc may not be at 100% in terms of collecting its contractual rent, but it has still been generating solid AFFO and FAD.
This has allowed the company to maintain its dividend at $0.67 per quarter since November 2019. That dividend level translates to a dividend yield of about eight percent (as of this writing).
While dividend hogs probably wish Omega Healthcare would raise its payout level, it’s important to remember that, unlike many companies, Omega didn’t cut or suspend its payouts during the pandemic.
With the company’s business getting back to normal, there’s every reason to believe that management will raise OHI stock’s distribution again in the foreseeable future.
Share Price Rose to Record Level: More to Come?
Lower revenues and earnings during the pandemic drove down the share prices of health-care REIT stocks like Omega Healthcare Investors stock.
Omega Healthcare Investors Inc isn’t entirely out of the woods yet—but it’s getting there. That sentiment is being reflected in its share price, which is a forward-looking indicator. On October 17, OHI stock hit a record intraday high of $34.77.
Currently trading at $33.87, Omega Healthcare Investors stock is up by 35% over the last six months, 30% year-to-date, and 19.5% year-over-year.
These are big gains, and OHI stock has more room to run. Wall Street analysts have provided a 12-month share-price target range of $34.00 to $38.00 per share. This points to gains of up to 12%.
Chart courtesy of StockCharts.com
The Lowdown on Omega Healthcare Investors Inc
With a portfolio of 893 facilities, Omega Healthcare is one of the largest health-care REITs. While its earnings took a hit during the pandemic, they’ve mostly recovered. During the second quarter, the company collected about 94% of its contractual rent and mortgage payments from its operators. Furthermore, it continues to work on resolving outstanding issues with its operators.
The company’s operating backdrop continues to improve, with its occupancy rates increasing and the tight labor market slowly moderating. Omega Healthcare Investors Inc’s acquisition pipeline continues to expand, with the company closing on $270.0 million worth of transactions in the second quarter.
The improving conditions helped Omega Healthcare report better-than-expected second-quarter results. The company has been generating healthy amounts of AFFO and FAD, which has helped juice its high-yield dividends.
Moreover, the improving industry dynamics have been helping propel Omega Healthcare Investors stock’s price to record-high levels.
