Omega: Healthy Returns

12/15/2014 8:00 am EST


Ari Charney

Analyst and Associate Editor, Canadian Edge and Personal Finance

This month, we decided to continue our flight-to-safety theme by tilting toward the lower end of the high-yield spectrum, with a healthcare real estate investment trust (REIT), explains Ari Charney, editor of Big Yield Hunting.

Omega Healthcare Investors (OHI) specializes in providing financing and capital to the US long-term healthcare industry, with a focus on skilled-nursing facilities (SNF).

And given the demand aging baby boomers will place on the healthcare system, many payors will likely opt for skilled-nursing facilities’ relatively low cost of care over pricier alternatives.

Omega’s core portfolio consists of long-term leases and mortgage agreements. Its leases are triple net, which means tenants are required to pay for all property-related expenses, including real estate taxes, insurance, and maintenance.

At the end of the third quarter, Omega owned or held mortgages on 562 skilled-nursing facilities, 21 assisted-living facilities, and 11 specialty hospitals, with nearly 64,000 licensed beds located in 37 states and managed by 50 third-party healthcare operating companies.

Toward the end of October, Omega announced a merger with Aviv REIT, Inc. (AVIV) in a unit-for-unit transaction that values the latter at $3 billion, a 16% premium to its closing price prior to the announcement.

The combined entity will offer investors the premier pure-play skilled-nursing facility REIT.

Management expects to continue making bolt-on acquisitions in what is a highly fragmented industry. Omega’s roll-up strategy, coupled with the tailwind from aging boomers, should lead to continuing growth over the long-term.

Omega Healthcare, with a $0.52 quarterly distribution ($2.08 annualized), has a forward yield of 5.5%. This REIT’s distribution is well supported, with a trailing 12-month payout ratio of 73.6%.

And with a price to funds from operations (P/FFO) per unit ratio of 13.6 compared to a North American healthcare REIT industry average of 15.3, Omega offers good value at current prices.

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