It hasn’t been an easy road for Omega Healthcare Investors (NYSE:OHI), as headwinds from the pandemic caused negative sentiment in this REIT. I am a firm believer that the headwinds about Skilled Nursing Facilities are overblown. One of the largest fears has been that OHI will be forced to cut its dividend. OHI paid its Q2 2020 dividend in full and, since the start of the pandemic, has paid 9 consecutive dividends without a reduction. We’re heading into OHI’s 3rd dividend of 2022, and once again, it looks as if investors will be paid in full. OHI has been one of my favorite REITs as its oversized income has allowed me to take advantage of the powers of compounding interest.
Skilled Nursing and Senior Housing Facilities play an important role in the aging U.S. population, and OHI specializes in these facilities. I have been invested in OHI since the end of 2017, as this is a sector that I believe will be the backbone of an aging population. There are an estimated 73 million Baby Boomers making them the 2nd largest age group in the U.S behind Millennials. An important aspect to consider when looking at OHI is that roughly 10,000 Baby Boomers turn 65 each day, and by 2030 all Baby Boomers will be at least 65 years old. Aging doesn’t stop with Baby Boomers as Gen-X will follow Boomers hitting the 65 mark and getting closer to needed Skilled Nursing and Senior Housing Facilities. Humans don’t stop aging, and there will be a never-ending clientele for the operators that utilize OHI’s real estate. Unlike office space being impacted by companies implementing hybrid or full remote policies, the services provided by Skilled Nursing and Senior Housing can’t be delivered remotely, which is one of the main reasons I have been bullish on OHI since I learned about them in 2017.
Reinvesting Omega Healthcare’s dividend has led to me increasing my share count by 45.78%
The power of compound interest is referred to as many things, and I am going to illustrate just how powerful it can be. I went through all of my transactions in my main dividend account, which excludes any shares I hold of OHI for the Dividend Harvesting series I write on Seeking Alpha. I wanted to construct the metrics and provide some insights into how this investment has fared.
I made two purchases of OHI, the first purchase was at the end of 2017, and the 2nd purchase was at the beginning of 2018. My average price per share based on the shares I purchased, excluding dividends, is $29.95. Over the years, I have watched OHI fall under my average price per share and appreciate into the low $40s. Never once did I consider selling as this is a long-term investment. My shares of OHI are enrolled in the dividend reinvestment program (DRIP), and every 3 months, another dividend payment is reinvested and buys additional shares.
Shares of OHI declined after my original investment, so I dollar cost averaged several months after the initial investment. The first dividend I received had already been paid, so it was a bit smaller than the future dividends. Since making the initial investment, I have received 19 consecutive dividends. Here are some metrics that I believe provide great insight as to the power of dividend DRIP programs.
- Since the 2nd dividend (17 dividends), my quarterly dividend income has increased by 42.41%
- All 19 dividends have generated 49.73% of my initial investment in dividend income
- Through the DRIP program, my share count has increased by 45.78% over 4 ½ years
Shares of OHI closed at $29.09 on 7/8/22, which is $0.86 (-2.88%) lower than my average price per share. While shares are currently trading under my average buy price, my investment is in the black by 41.58% due to reinvesting the dividends. I have a set it and forget it mentality with OHI because I believe its business will emerge victorious from the negativity, and ultimately shares will appreciate. When OHI trades in the high $20s or low $30s, it allows me to add additional shares through the DRIP program, which increases my future income and appreciation potential.
It’s important to be honest about your investment thesis and why you are allocating capital toward a specific investment. OHI is an income play that I believe has future capital appreciation potential. If OHI just trades sideways, I will still be perfectly happy as my first investment goal is income. I have been here before with OHI trading under $30, and there is a chance I will be here again in the future. Eventually, I will have reinvested enough dividends to have doubled my share count without adding additional capital from my pocket. Once that occurs, my next double should occur twice as fast, provided a dividend reduction doesn’t occur and OHI’s share price replicates what it has done in the past.
Why I am bullish on Omega Healthcare
At the end of Q1 2022, OHI’s portfolio consisted of approximately 76% Skilled Nursing Facilities. Skilled nursing facilities (SNFs) are residential health facilities that provide nursing, rehabilitation, and related services. In SNFs, Medicare covers short-term skilled nursing and rehabilitation services for beneficiaries after staying in an acute care hospital. In 2019, approximately 15,000 SNFs provided 1.5 million fee-for-service (FFS) beneficiaries with approximately 2 million Medicare-eligible stays, which are 4% of Medicare FFS beneficiaries. The SNF market was valued at $175.9 billion in 2021 and is expected to expand at a compound annual growth rate of 3.3% into 2030. While all baby boomers are expected to reach 65 years of age in 2030, the number of adults who will be 65 or older is expected to rise until 2050, when the number of adults aged 65 or older reaches 85.7 million.
The remaining 24% of OHI’s portfolio is geared toward Senior Housing Facilities. Many people don’t think about what life will be like at the end, but the reality is we will all need some type of assistance. By 2050, it’s estimated that over 1/5th of the population will be 65 or older, and I am expecting that the need for senior housing will drastically increase. There are many positives to Senior Housing Facilities as they provide a community creating a social aspect of living among other older adults. There is access to a variety of amenities and services and round the clock staff to provide assistance. It’s hard to discount the fact that the U.S. population is aging and that the need for these types of facilities won’t increase.
OHI is a triple-net lease equity REIT (Real Estate Investment Trust) that supports Skilled Nursing Facilities and Assisted Living Facility operators with financing and capital. OHI has a portfolio of long-term healthcare facilities and mortgages on healthcare facilities throughout the U.S. and the U.K. This sector has limited supply growth due to regulatory restrictions, and Skilled Nursing or Assisted Living Facilities can’t pop up in every town. OHI has 938 properties with 64 operators in its portfolio across 41 states and the U.K. The aging baby boomer population is expected to create a multi-decade increase in demand for skilled nursing facilities, with a 44% projected increase in adults over 65 in the next 20 years.
Triple Net Leases or NNN is a lease agreement on a property where the tenant or lessee assumes the responsibility of paying all the expenses for the property. Unlike paying rent under the parameters of an NNN, the tenant agrees to pay all the expenses for the leased space, which includes real estate taxes, insurance, and maintenance on top of the regular payments such as rent, utilities, and all other payments that are usually the responsibility of the landlord. On the landlord side, NNNs can become a reliable source of income with minimal overhead costs as most of them are passed on to the tenant.
I love REITs that focus on NNNs because they are favorable to the landlord. OHI has 87% of its revenue tied to NNN master leases, with 95% of its revenue tied to fixed-rate escalators. OHI has a 2.3% weighted average fixed escalator built into their leases. 98% of their portfolio leases expire after 2024, with an average lease term of 9.4 years. 14.3% of OHI’s leases expire in 2027, 15.8% in 2031, and 36.5% in 2032 and beyond. OHI is operating a healthcare REIT that I believe is positioned well to meet the influx of future demand its facilities will face.
Why I believe Omega Healthcare is undervalued and the large yielding dividend is safe
Based on the three metrics I utilized to compare REITs within the same sector, OHI has the largest dividend yield, trades at a low price to funds from operations (FFO), and has a low EBITDA to total debt ratio.
I will be using the following companies to compare OHI against:
The peer group has a price to FFO range of 8.52 to 16.03. OHI currently sits at the lower end of the range with a 10.09x price to FFO. The average price to FFO of the group is 12.80x. Based on the peer group, OHI looks to be trading at an attractive price to FFO as it’s well under the peer group average.
OHI is trading at a 6.46x EBITDA to total debt ratio, which indicates that OHI could eliminate its total debt over 6.46 years based on how much EBITDA they generate. This is often a metric that is utilized to assess a REIT’s debt load. The peer group has an average EBITDA to total debt at 6.99x with SBRA having a 10.06x level. OHI seems to be positioned well as its EBITDA to total debt level falls on the lower end of the spectrum.
OHI had increased its dividend for 17 consecutive years from 2003 – 2020. OHI has halted its dividend increases since the start of the pandemic. 2022 will be the third year that the annual dividend will be $2.68 per share. Since the start of the pandemic, a portion of the investment community has been concerned with a possible dividend reduction from OHI, and this chatter never seems to disappear. My feeling is that a dividend reduction would have already occurred if it was going to happen. OHI has a strong track record of growing and paying its dividend. OHI delivered a top and bottom-line beat in Q1 as their Adjusted FFO came in ahead of estimates by $0.04 ($0.74) while they posted $249.3 million in revenue, which was $38 million ahead of estimates.
OHI’s Q1 Adjusted FFO came in at $0.74, and their Funds Available for Distribution (FAD) were $0.65 in Q1. OHI had a dividend payout ratio of 91% on its Adjusted FFO while its dividend exceeded FAD at a 103% level. I believe that this made the dividend reduction talks surface again because some investors weren’t taking management at face value with their explanation. For years, investors have been concerned with OHI’s high yield, but the dividend has always remained intact. We’re headed into Q2 earnings and OHI’s next ex-dividend date at the end of the month. Management has not mentioned a dividend reduction, and I don’t believe one will be announced, let alone before the next dividend is paid in early August. Management addressed the FAD level on the Q1 earnings call and indicated that the elevated FAD payout ratio is temporary. At the end of Q1, 12.3% of contractual rents had not been paid so this capital was excluded from the FAD figure. Management also cited that the sale of the Gulf Coast portfolio and the Guardian restructuring that’s on the horizon should provide OHI with the ability to lower the FAD ratio to under 100%. In the June Investor Day presentation, OHI indicated that 2022’s full-year dividend would be $2.68, with Q2’s dividend being paid in full. Until I hear management address a dividend reduction, I am unwilling to pay attention to rumors as management has a better insight into their business than people who follow the company.
From the peer group, OHI has the largest dividend yield at 9.10%. OHI’s dividend is also fully covered by its $2.94 of FFO per share, which is 9.7% over its annual dividend. I believe that OHI offers the best value proposition in the space as investors are getting a large dividend at a low price to FFO and EBITDA to total debt ratio.
OHI has been a core dividend holding of mine for years. My share count has increased by 45.78% from reinvesting the dividends, and while the share price has fluctuated over the years, my quarterly dividend income has grown by 42.41% since the 2nd dividend was paid. I still believe that OHI presents a long-term income generation and capital appreciation opportunity. Skilled Nursing and Senior Living Facilities will only become more important over the next several decades as the population continues to age. Care cannot be provided remotely, and this industry is unlikely to be disrupted. OHI under $30 is a strong buy, and I may buy more shares in my main account prior to the Q2 earnings call. I believe that once OHI settles its payment issue from some of the providers, it will act as a positive catalyst, sending shares into the upper $30s. Until then, I will be more than happy reinvesting the large dividends at depressed prices and accumulating additional shares.