While I was researching my recent article on Top Performing REITs for 2012, I ran across one stock which should have been on that list, but I found it so interesting I decided to write a separate article. That company is Omega Healthcare Investors Inc (OHI). So far in 2012, Omega Healthcare has outperformed the big REIT ETF - Vanguard REIT Index ETF (VNQ) - by about 1% and the current dividend yield for OHI is just over 8%. In contrast to most of the REIT stocks discussed in my previous article, Omega Healthcare also has been increasing the dividend at a nice pace.
Omega Healthcare Investors primarily owns and leases or finances skilled nursing facilities - 98% of the portfolio - for operators in the skilled nursing care business. Currently the company lists 432 facilities - 91.5% owned, 8.5% mortgage financed - in 34 states with 51 different operators. The company lists gross investment in the portfolio of $2.8 billion, of which $2.2 billion has been made over the last eight years. Omega Healthcare's new purchase investment has averaged $400 million per year for the last three years. The leverage goal is total debt of 4 to 5 times annual EBITDA. 2011 leverage was at 4.8 times. Bond covenants limit total debt to asset value at 60%. At the end of 2011 debt was 51% of assets.
The dividend payout ratio from Omega Healthcare is targeted at 80% to 85% of the funds from operations - FFO. Here are the FFO per share and dividends paid plus the dividend growth rate for the last five years:
- 2007: FFO: $1.38, Dividends: $1.11, +13.3%
- 2008: FFO: $1.45, Dividends: $1.20, +8.1%
- 2009: FFO: $1.47, Dividends: $1.22, +1.7%
- 2010: FFO: $1.66, Dividends: $1.42, +16.6%
- 2011: FFO: $1.91, Dividends: $1.59, +12.0%
For 2012, management FFO guidance is a range of $2.09 to $2.12 per share. The company has consistently beat the high end of guidance by a few pennies, which means FFO and the dividend should increase by about 11% in 2012. The dividend was increased for the first two distributions of 2012, with each about 10% higher than the year-earlier payout.
The major risk to Omega Healthcare is that the revenue for the company's tenants primarily comes from the government programs of Medicare and Medicaid. With the fiscal problems facing both the federal - Medicare - and many state - Medicaid - governments, the reimbursement levels to skilled nursing facilities will probably come under continued pressure. Omega Healthcare receives contracted lease or mortgage payments but it will not be good for the company if the facility operators cannot remain profitable.
In spite of the risk, the growing number of elderly citizens in the U.S. requiring skilled nursing care will continue to grow. With the current 8% yield and prospects for growth, Omega Healthcare is an attractive investment candidate.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.