It takes 25 years to become a Dividend Aristocrat, but a company doesn't suddenly become well run at the 25-year mark. That's why you'll want to take a close look at Omega Healthcare Investors (NYSE:OHI), which is sitting on an 18-year streak of annual dividend hikes. Adding to the allure is the company's generous 7.1% dividend yield. Here are some key facts to know about this healthcare real estate investment trust (REIT) as it keeps moving toward Aristocrat status.
1. The dividend
Omega Healthcare has an 18-year streak of annual dividend increases, roughly seven years shy of Dividend Aristocrat status. However, the dividend has been stuck at $0.67 per share per quarter since November 2019. There's a good reason for this given the COVID-19 pandemic backdrop, but it means that the full-year dividend in 2020 increased over 2019 even though the dividend wasn't actually increased during the year.
In other words, the annual streak is still intact, but if Omega Healthcare doesn't increase its dividend by the end of 2021, its streak will end.
Given the health scare, there's no way to know what will happen. However, this isn't the first time that Omega's board has held the quarterly dividend steady for more than a year. That last time was during the 2007 to 2009 recession. So history suggests that this REIT is simply following the same playbook, taking a cautious stance in a difficult operating environment, which is not a bad thing.
2. The coronavirus and the business model
Omega Healthcare Investors owns senior housing properties, with a heavy focus on nursing homes (78% of its rents). Since the coronavirus is most easily spread in group settings and tends to have the worst impact on older adults, senior housing has seen falling occupancies and rising costs. Furthermore, the virus has made it difficult for operators to give tours so that vacant units can be filled.
Those problems were particularly acute in 2020, but they've begun to fade in 2021 thanks to the distribution of vaccines . For example, Omega recently announced that occupancy increased three percentage points between January and May this year after falling 11 percentage points in 2020. Clearly, there is still more work to be done, but the business appears to be turning a corner.
Meanwhile, the U.S. government has been very supportive of senior housing during the pandemic, realizing the importance of this property type. During Omega Healthcare's 2021 first-quarter earnings conference call, management stated that it believes this assistance will continue in the future. That should provide ample breathing room for Omega's tenants.
3. Net-lease structure and nursing homes
One of the key issues for Omega is that it owns the buildings, but other companies lease them out. Those leases are structured such that tenants are responsible for most of the costs of the properties they occupy. This is called a "net-lease" structure, and these agreements are generally considered low risk. For example, while the pandemic was a big problem for Omega's tenants' revenue and costs, they still owed the same rent. Yes, Omega has worked with tenants who needed help, but Omega wasn't directly impacted by the pandemic. Some healthcare REITs actually own and operate senior housing assets, with property performance flowing directly to the top and bottom lines. Their businesses were hit much harder than Omega's.
And yet, Omega has one of the highest yields in the healthcare REIT sector. That's partly because of its focus on nursing homes, which are generally paid for by Medicare and Medicaid. That's often seen as a drawback since the government could change its payment formula. Omega believes that risk is overblown, however, and that its broad diversification should help to offset any impact from changes in how these programs are financed. The company owns over 950 properties across 70 operators and 42 states.
Meanwhile, nursing homes aren't really optional; people generally only enter nursing homes when there are few other cost-effective options based on the level of care needed. Layer the net-lease structure on these facts, and Omega's business starts to look a lot more resilient.
A leap of faith
To be fair, buying Omega today requires a strong tolerance for risk. It is facing very real headwinds thanks to the pandemic. However, the facilities it owns provide needed care in a cost-effective manner.
Recognizing this, the government has so far been very supportive in a time of need. And Omega's broadly diversified portfolio should help it to weather a hit from any individual property or lessee default. Considering the company's 8-year streak of dividend increases, the second half of 2021 will likely determine whether or not the streak gets to year 19. But if history is any guide, Omega's business is resilient and well run. And that makes the fat 7.1% yield very attractive even with the headwinds. For more aggressive income investors, Omega is probably worth the risk. It's a bet that the dividend streak does, in fact, keep going.