Omega and Ventas: Healthy Gains and High Yields

02/12/2019 5:00 am EST

Focus: REITS

Todd Shaver

Founder and Editor-in-Chief,

Healthcare is a sector every investor should be invested in, given the fact that Baby Boomers are retiring at a rate of 10,000 per day, offering the demographic tailwinds to our recommendation for two healthcare REITs, explains John Freund, contributing editor to Todd Shaver's Bull Market Report.

The big news coming from Omega Healthcare Investors (OHI), which provides a yield of 6.9%, is that the company purchased MedEquities Realty Trust (MRT) for $600 million in cash and stock. MedEquities sports a portfolio of 34 properties in niche areas of healthcare: medical office buildings, inpatient rehab facilities and acute care hospitals.

Omega previously had very little exposure to these market segments, so this transaction provides welcome diversification to the company’s core portfolio of skilled nursing facilities.The acquisition also generates some much-needed cash flow.

We love this management team. As one of the most experienced in the business.  With $1.75 in assets for every $1 in liabilities, Omega is practically a fortress by REIT industry standards, earning itself the best credit rating in the field (BBB-).

Being able to borrow at better terms helps the company. It also means Omega can borrow on better terms than most, which enabled the company to secure capital while working out exits for ailing operators.

Omega ended the year with close to $1 billion in liquidity, so even after the MedEquities deal there’s room to acquire more properties or buy back stock if management wants to reward shareholders in the short term. The REIT is on extremely solid footing headed. We stuck with the company through its lean period, and now it’s time to reap the rewards.

Also in the healthcare REIT space, Ventas (VTR), yielding 5.2%, is primed for long-term growth, but for very different reasons. This company operates on a RIDEA structure that permits it to actively manage its own properties instead of leasing to operators.

Ventas is no passive landlord, but financially engaged with its operations through upfront capital expenditures and managerial costs, participating directly in their properties’ ultimate success or failure.

We like RIDEA REITs because they have more flexibility to make changes to their properties based on customer needs. It should be no surprise then that RIDEA REITs sport higher-than-average occupancy rates.

Disruptive technologies like artificial intelligence and cloud computing are changing the game for healthcare operators, and soon costs will be coming down across the board. When that happens, we suspect companies like Ventas will leap ahead of competitors on margins and profitability.

Like Omega, Ventas has a grade-A management team. They’ve managed to raise the dividend by an annualized rate of 8% over the last 18 years and have done so while maintaining a relatively low debt-to-EBITDA ratio.

We love it when companies grow without a reliance on debt, and Ventas has also managed to return an astounding 2400% to shareholders since the current CEO took over nearly two decades ago. This has been one of the most bankable stocks and dividends in the Healthcare REIT space, and we foresee more of the same in 2019 and beyond.

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