Breaking News
Investing Pro 0
🚨 Our Pro Data Reveals the True Winner of Earnings Season Access Data

This REIT Yields Over 7% And Will Profit From A Major Healthcare Trend

By Modest MoneyETFsNov 07, 2018 11:35PM ET
www.investing.com/analysis/this-reit-yields-over-7-and-will-profit-from-a-major-healthcare-trend-200356639/
This REIT Yields Over 7% And Will Profit From A Major Healthcare Trend
By Modest Money   |  Nov 07, 2018 11:35PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
US500
-1.04%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
PFE
-0.63%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
JNJ
-0.56%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
OHI
-2.15%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

Investors looking to add healthcare stocks to their portfolio typically buy a pharmaceutical company like Johnson & Johnson (NYSE:JNJ) or Pfizer (NYSE:PFE). But investors can also gain exposure to the healthcare industry indirectly, through Real Estate Investment Trusts that invest in healthcare properties. The beauty of healthcare REITs is that they commonly offer significantly higher dividend yields than pharmaceutical stocks.

For example, Omega Healthcare Investors Inc (NYSE:OHI) is one of the biggest healthcare REITs in the U.S., and it has a 7.7% dividend yield. It has a very high dividend yield, compared with the S&P 500 Index, which has an average dividend yield below 2% right now. Plus, Omega has potential for future growth, thanks to a huge healthcare trend set to unfold over the next several years. This makes Omega an attractive stock for income investors.

Business Overview & Recent Events

Omega Healthcare Investors is a REIT that owns healthcare properties. The company was founded in 1992, and today has a market capitalization above $6 billion. It utilizes long term triple-net leases. The triple-net structure is advantageous for Omega, as it provides fixed rent payments from tenants with annual escalators. And, property level expenses (such as labor, insurance, property taxes, and capital expenditures) are the operator’s responsibility.

At the end of the third quarter, Omega’s portfolio consisted of 923 healthcare facilities, located in 41 states and the United Kingdom. Its portfolio includes skilled nursing facilities (83% of revenue), senior housing (13% of revenue) as well as a small collection of other properties (4% of revenue).

OHI Overview
OHI Overview

Source: Investor Presentation, page 4

The past year has been difficult for Omega, due to some problems with two tenants, Orianna and Preferred Care, which entered bankruptcy. Preferred Care was a relatively small tenant with annual contractual revenues of just $3 million, but Orianna was Omega Healthcare’s fifth-largest tenant, with annual contractual revenues of $47 million.

Elevated costs related to the issues facing Orianna and Preferred Care weighed on Omega’s cash flow, but the company is making progress reshaping its portfolio. Omega has transitioned the Mississippi based Orianna facilities and will generate contractual annual rent of $12 million from them. The company reaffirmed it expects $32 to $38 million in annual rent total from these assets once they are transitioned or sold.

Omega’s strong third quarter earnings report showed that the steps taken to improve its property portfolio are having a positive impact. For the quarter, revenue of $222 million increased 1% year-over-year, and beat analyst estimates by $28 million. Funds from operation (FFO) per share of $0.77 also beat by $0.02 per share, and declined 2.5% from the same quarter last year. Higher tenant revenue was more than offset by higher restructuring and interest expenses.

Still, Omega generates more than enough cash flow to reward shareholders with a strong dividend. For 2018, the company expects FFO-per-share in a range of $3.03 to $3.06. Assuming the company reaches its FFO forecast, it will easily cover its $2.64 per share dividend. There could even be room for future dividend increases, as the company is set to grow FFO in the years ahead.

Profiting From The Aging Population

One of the advantages of investing in health care REITs is that the industry has a positive long-term growth outlook. Healthcare REITs like Omega are ideally positioned to capitalize on a major trend: the aging population. Older generations of Americans such as the Baby Boomers are large in size, and growing, relative to other generational groups. To that end, Omega expects the 65+ population to continue growing, as a share of the overall population.

OHI Growth
OHI Growth

Source: Investor Presentation, page 13

Continued growth of the 65+ cohort means demand for healthcare real estate properties, such as skilled nursing facilities and senior housing facilities, is likely to grow for the foreseeable future. The number of elderly people in need of healthcare is expected to grow at a fast pace over the next decade. In addition, the trend is for the elderly to spend an increasing amount of money on healthcare. Healthcare spending is likely to rise at a faster rate than GDP growth in the United States going forward.

Omega’s portfolio remains in good shape. It will see only a small portion of its leases expire over the next decade. Moreover, it has no material debt maturities until 2022. Therefore, the REIT is likely to enjoy reliable free cash flows in the upcoming years, without any shocks from debt maturities. Omega’s FFO growth could be restrained while the company works through its tenant issues, but the company is well-positioned for the long run.

Omega stock could generate strong returns for shareholders over the next five years, due to FFO growth, a low stock valuation, and dividends. During the last decade, the company grew FFO at a 4.5% average annual rate. As it is likely to complete its asset repositioning this year, it is reasonable to expect the REIT to grow its FFO at a 4.5% average annual rate over the next five years.

In addition, Omega shares appear to be undervalued today. Lingering concerns over its property portfolio caused Omega’s stock valuation to decline in the past year. Now, Omega stock trades for a price-to-FFO ratio of 11.2, compared with a 10-year average ratio of 12.4. This means Omega is valued more cheaply than its long-term historical average, which could signal a buying opportunity. The stock is expected to revert towards its average valuation level, since the company’s turnaround efforts are likely to be successful. If this occurs, the stock will enjoy a 2.1% average annual gain thanks to expansion of the valuation multiple through 2023.

Lastly, dividends are a major component of REIT shareholder returns. In this case, Omega stock pays a current dividend yield of 7.7%. This is a high and appealing dividend for investors searching for yield in a low interest rate environment. Adding it all up, the combination of valuation changes, FFO growth, and dividends cumulatively result in total expected returns of over 14% per year.

Final Thoughts

Stocks with high dividend yields should be approached with caution. It is important for investors to understand the unique risks of high-yield stocks, and make sure the high yield is sustainable. In this case, Omega appears to be a safe high-yield stock, with sufficient cash flow to maintain the dividend payout. And, Omega has positive growth potential for the future, thanks to the aging population and continued need for healthcare real estate. With a 7.7% yield and total expected returns of over 14% per year, Omega is an appealing stock for income investors.

Original post

This REIT Yields Over 7% And Will Profit From A Major Healthcare Trend
 

Related Articles

ETF Central
Growth Potential of China ETFs By ETF Central - Jan 31, 2023

China’s economy stalled last year amidst strict lockdowns related to Zero-Covid policies, in addition to an ailing property market. This weighed on Chinese stocks, with the...

This REIT Yields Over 7% And Will Profit From A Major Healthcare Trend

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email