Ben Reynolds and the editorial team at Sure Dividend have just launched a new monthly advisory service entitled Top 10 REITs. Here, we continue a 5-part series that counts down their initial five favorite REITs.

Real estate investment trusts — or REITs, for short — can be fantastic securities for generating meaningful portfolio income. REITs widely offer higher dividend yields than the average stock.

The Top 10 REITs service ranks more than 110 REITs every month and analyzes the Top 10 REIT buys with 4%+ yields based on expected total returns and safety.

Read Top REITs Part 1: Four Corners Property Trust here…

Read Top REITs Part 2: CareTrust REIT here…

Read Top REITs Part 3: Alpine Income Property Trust here…

Omega Healthcare Investors (OHI) — our 2nd top-ranked REIT — is a real estate investment trust (REIT) that invests in the long-term healthcare industry. Its focus is in skilled nursing and assisted living facilities, and its portfolio is primarily triple-net leases operated by healthcare providers.

Omega has the majority of its properties in the United States but has a small presence in the United Kingdom as well. Omega was founded in 1992, produces about $945 million in annual revenue, and trades with a market capitalization of $7.7 billion.

Omega reported second-quarter earnings on August 2nd, 2021 and results were much better than expected, with records for both the top and bottom lines. Funds from operations (FFO) per share was 85 cents, besting estimates by two cents.

Revenue was up to $257 million, representing a fractional gain year-over-year, but well ahead of expectations for a revenue decline. The trust saw 98% of contractual rent and mortgage payments for July, 98% for Q2, and 99% for Q1 as collections have improved immensely since the worst of the pandemic.

Omega implemented a new at-the-market share offering worth up to $1 billion and refinanced eight facilities to improve its capital structure. Following Q2 results, we now expect $3.30 in FFO per share for this year, driven by strong rent collection trends and favorable capital recycling.

Healthcare in general is much less cyclical during tough economic times than most sectors, simply because the vast majority of healthcare providers are non-discretionary, meaning customers need the service irrespective of economic conditions. Given that Omega is primarily exposed to skilled nursing and assisted living facilities, it performed quite well during the Great Recession, and we expect that to be the case during the next recession as well.

The trust’s debt-to-equity ratio is elevated at 135% today, and the current run rate for interest expense is about $235 million annually. Those are significant numbers, which is surely why Omega opts to issue new common shares to raise capital.

The payout ratio, however, remains around 80% of FFO, so unless there’s a sizable, as yet unseen headwind to FFO on the horizon, we think Omega’s dividend is safe at current levels.

We see Omega’s growth at just 2% annually, which is well below its historical average of more than 5%. We like its exposure to the growing population of people that need assisted living, but tenant solvency issues and expensive financing have kept a lid on growth of late, and we believe this may persist.

Even so, the stock is quite cheap today at just 9.8 times FFO estimates for this year, well short of our estimate of fair value at 12 times FFO. That implies a 4%+ tailwind to total annual returns from the valuation, and combined with 2% growth and the 8.3% yield, we see a very enticing 12.3% total annual return forecast for Omega in the coming years.

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