Omega Healthcare: Medicare Windfall

07/13/2016 7:00 am EST

Focus: STOCKS

New Medicare rules that will take effect next year will ring up profits at this healthcare company, boosting its dividend, which currently yields nearly 7% states Will Romov, editor of Global Income Edge.

Omega Healthcare Investors (OHI)

Starting in 2017, the new rules will allow hospitals to discharge hip and knee replacement patients in less than three days, which had been the required hospital stay.

Because the patients will still need more care, they will be sent to skilled-nursing facilities instead, such as those that real estate investment trust Omega owns.

Longer stays at skilled-nursing facilities will mean higher Medicare payments for Omega. Patients will have higher bills at these facilities because they will arrive sooner and that will mean higher Medicare reimbursements.

Higher reimbursements to the facilities will lead to higher rent revenues for Omega. Of its 949 properties 854, or 90%, are skilled-nursing facilities, with the rest assisted-living properties.

Plus, Omega will get a much bigger share of the Medicare increases because the REIT continues to add more skilled-nursing facilities.

The aging of the population continues to work in Omega’s favor. Patients aged 85 and older are more likely to require post-hospital care. This will increase Medicare payments to skilled-nursing facilities.

Skilled-nursing facilities are low-risk. Thanks to a geographically diversified portfolio of such facilities in 42 states and the United Kingdom, Omega can weather setbacks in a particular region.

Because Omega’s skilled-nursing tenants get most of their revenue from Medicare reimbursements, rent payments are dependable. Omega’s use of triple net leases provides further risk protection.

Alongside its industry-leading funds from operations (FFO) growth is Omega’s industry-leading dividend growth rate. The company paid a $1.73 dividend in 2012, which increased at an average annual rate of 8.7% to $2.22 in 2015.

Omega’s cash flow gives it room to continue increasing its dividend. The company’s forward price-to-earnings ratio of 16 is substantially lower than the industry average of 31. Overall, we believe Omega shares are a bargain.

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By Will Romov, Editor of Global Income Edge

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