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Omega's 9.7% Yield: Despite 5 Huge Risks, It's Worth Considering


  • Do not confuse Omega’s sell-off as just another REIT facing macroeconomic headwinds. There is a lot more going on here.
  • For starters, this Skilled Nursing Facilities REIT is considering draconian rent concessions for many of its operators, including Orianna, Signature, Daybreak, Preferred Care, and arguably Genesis and others.
  • And beyond the dire operator environment, Omega faces huge risks from regulations, the market cycle/demographics, macroeconomics, and a shrinking dividend coverage ratio.
  • Finally, this article considers a few things that could actually go right for Omega, before concluding with our views on who might actually want to consider owning this big-dividend REIT.
  • We are long Omega Healthcare Investors. This article was originally shared within our Marketplace Service, The Value & Income Forum on March 3rd.

Many of Omega Healthcare Investors' (NYSE:OHI) operators (including Orianna, Signature, Daybreak, Preferred Care, and arguably Genesis and others) are increasingly unable to pay their rent, thereby forcing Omega to consider draconian rent concessions. And that's just one of the five huge risks Omega is currently dealing with. The others include a terrible regulatory environment, an over-hyped demographic wave and market cycle, massive macroeconomic headwinds, and a dividend coverage ratio (as compared to FAD, AFFO and shrinking cap rates) that is a flashing red flag. After reviewing these five huge risks, we consider a few things that could actually go right for Omega, and then conclude with some ideas about who might want to consider investing in this big-dividend REIT.

Note: We are long Omega Healthcare Investors. This article was originally shared within our Marketplace Service, The Value & Income Forum on March 3rd.

About Omega:

Omega Healthcare is a big dividend (+10% yield) real estate investment trust ("REIT") that maintains a portfolio of long-term healthcare facilities in the United States and the United Kingdom. As of 12/31/17, 83% of its investments were in Skilled Nursing Facilities ("SNF") and 17% in Senior Housing.

Omega has an impressive track record of raising its dividend every quarter. However, the company recently announced that future dividend increases have essentially been put on hold.

According to CEO Taylor Pickett during the latest earnings call:

"We're proud of our unprecedented streak of 22 straight quarterly dividend increases, wherein we increased the dividend from $0.43 per share to $0.66 per share, 53% over five and a half years. Our quarterly dividend growth was predicated on and driven by our consistent FFO and FAD growth. As a result of our strategic repositioning activities, 2018 will not be a growth year and therefore we do not expect to increase the dividend during 2018."

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Analyst’s Disclosure: I am/we are long OHI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (79)

jmatson profile picture
What publication would that be? It always helps to provide a link.
Anyone interested in OHI might want to read an article in the leading investment tabloid publication titled “Could Health Care Crash?”
phamp1973 profile picture
What is a good price to buy OHI?
Age respects nobody. The oldest segments of the population will EVENTUALLY grow much larger.

There has never been an outbreak of good health.

Try buying 24 hour nursing help on Amazon.

For the patient investor, the experienced management team will navigate these shoals and produced a continued stream of very high dividends and recovery in the share price.

Long OHI.
Agree with your aging assessment. Time marches on. That’s not the issue with OMI. Follow the money. Who will pay for OMI services. Unless it’s all private pay (and we know it’s far from it), the answer is Federal reimbursement tied to Medicare and Medicad. These programs are already underfunded and further reductions are on the horizon. Who will pay the bill?
Possible Tail Winds...
* lower corporate tax rates moving forward
* regulatory concerns lower in this current administration (mentioned in article)

Thanks Blue as I am 15% down and weighing my options!
This aspiring passive income investor sees opportunity to accumulate, much negative sentiment. I acknowledge the risks, however.
When this stock was 34.00 it was the great 8% yielder, with increasing there dividends and smooth sailing and now its buyer beware.
Vandooman profile picture
Good article. I dumped OHI before it crashed. The more the analysts touted the stock the more I became a skeptic. Health care is a lousy business and the screws will continue to be put to providers.

Unfortunately inexperienced investors often go shopping for yields, not realizing that a high yield usually is the result of a low stock price caused by a deteriorating business. They invest in turnarounds, from GE to OHI. But these companies very often don't turn around. I sold IBM at $192 6 years ago and it is now trading at $159. Some turnaround. I sold GE at $35 10 years ago and it is trading at under $15. Try to buy at the bottom and you often find the bottom is flat. If a behemoth like GE or IBM has no moat, why would you assume OHI has one.

When things go against me I take my medicine and move on. Buy companies with the wind at their backs. If you want to gamble intelligently, buy an assortment of Amazon, Facebook, Salesforce, Google etc and do nothing for 5 years.
A beautiful well-balanced article. Bravo
After this was published, Orianna filed for bnankruptcy.

OHI is providing DIP financing.

Orianna will be paying $1 million a month rent, down from about $4 million prior to their problem period.

OHI will sell 19 facilities and transition the rest to a new operator.

This is a MUCH worse outcome than the cut in revenue to $32-$38 million annually that they previously discussed.

Management's credibility has taken (another) hit, IMHO.
Blue Harbinger profile picture
Alex- This was announced Wednesday, and Omega reaffirmed Adjusted FFO guidance and Orianna guidance: “We continue to expect that our post-transition restructuring rent for the transition portfolio and rent equivalent for the 19 properties to be sold will ultimately be in our previously-estimated range of $32.0 million - $38.0 million." Here is the press release: http://bit.ly/2D8TMoX Thank you.
How many times/ways/years can one rationalize .. "Woof, Woof."
A co, as I have said for years, grows by crummy acquisition, then writes off 20++% of it.
Why would anyone tie themselves to ANY ticker symbol??? If you want 9.7%, you can get it via innumerable funds where the ills of one company are buried in the noise.
Blue Harbinger profile picture
N93143: I agree with the benefits of diversification. But for grins, would you mind sharing one of the "innumerable funds" offering a 9.7% yield? Thank you.
CapeHornInvesting profile picture
Won't touch this one with a 10 foot pole until I see 2 quarters of increasing dividend. So many better stocks to invest in.

I'm also stuck with $2K of Welltower. Nothing good in any of these SNF stocks.

MPW, GMRE, etc., lots of better alternatives. OHI and Welltower need to feel the pain of low stock prices for a while. If they can turn around, maybe they will pay closer attention to their own markets in the future. And GMRE is an externally managed debt laden monster, but it stacks up better than OHI or WELL.

Ugh. Talk about letting investors down.
Good article. I am long OHI and holding for now. Thank you for the good article.
Blue Harbinger profile picture
Thanks for reading Panhandler1949!
Thomas Yeggy profile picture
Seem to remember an analyst refer to FAD being near 100% of the dividend for 2018.Also isn't the Affo payout ratio of 89% high but still lower than 100%. The 89% figure seems to imply that utilizing AFFO as the measuring metric that the dividend is not covered by AFFO. Maybe only me but I think the FAD payout which is very close to 100% is a better metric for the thought you are trying to convey.

Very well written article .You may want to edit the "write" to right.
Blue Harbinger profile picture
Thomas- good point. FAD payout is in the table in the article. 91.9% and going in the wrong direction. Thank you. PS. I see the write vs right thing. Lol. Sorry!
Income seekers generally become less alarmed at sinking asset values as long as the dividend cash flow continues. We all knew that rising interest rates would affect the REIT space. It was a given. The difference with Omega is a singular trait spelled SNF. . . . . pure and simple.
I am long. Have been since 2014. The divs have lowered the basis below the current price. I am going to hang in there and ride it for now. I might consider selling if I need to lower some tax gains down the road.
Vandooman profile picture
Not sure what you are saying. Dividends don't lower the tax basis. I guess you mean it reduced the net investment. That seems irrelevant because you could have gotten dividends somewhere else while watching the shares go up. Never be loyal to an investment. Do what you have to do and move on. Invest in companies with the wind at their backs, not in their faces. High yields come from damaged companies with low stock prices. Yield shopping is a dangerous game.
I won't buy this stock.
cemanuel profile picture
OHI is my largest REIT position, about 2.5% of my total portfolio. The last two ERs have not been good but haven't pointed to imminent doom either so I'm just holding and collecting dividends. A div cut is becoming more likely but it wouldn't bother me to see it cut to 7% or so. I wouldn't be waving pom-poms either but that risk is part of owning REITs and if things stabilize the company has shown that they would re-grow it.
Vandooman profile picture
How about if it is cut to 2% or zero?
I bought OHI recently at ~$27 and plan for very long term. no doubt OHI have seen significant negative fundamentals which ignited a massive sell-of. I tend to think that the negative news are well compensated in the share price cut. of course, it is possible that more problems will show on later. management tend to avoid publicity of negative news until it can't be hidden any further. yet, I think that even moderate negative news are well compensated by the eroded share price, which corresponds now to 10% dividend yield. even if the business deteriorates further, there is yet enough space for dividend cuts while yet providing nice return (after all 8% or even 7% is not that bad on the long run). on the other end, if the worst of all is over and the company preserves it's current level of income or even improves it, it would make an outstanding investment. I hope that this favorable alternative is more probable, which is why I'm very long on OHI. time will tell.
Vandooman profile picture
Betting on turnarounds where the fundamentals are bad is usually a very costly idea. Companies as big as IBM and GE blathered about turnarounds that never happened. Hope you make out well but I sold OHI before the crash and wouldn't even consider holding it. Being very long is even worse. When you hear bad news, 80% of the time the true picture is worse.
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