When Omega Healthcare Investors (OHI 1.70%) announced a dividend of $0.67 a share on April 23, that marked the 11th straight quarter of payouts at that level for one of the largest owners of nursing homes in the business.
That also gives this real estate investment trust (REIT) a yield of an inflation-beating 9.70% at an April 26 stock price of $27.62 per share. But could a dividend cut be in the offing?
OHI hasn't cut its dividend in more than two decades, including during the worst of COVID-19 as occupancy and revenue declined dramatically for many of the 63 operators in OHI's portfolio comprising 939 primarily skilled nursing and assisted living facilities in 42 states and the United Kingdom.
OHI depends on the rent it receives from these operators. While its client base has held up fairly well, an April 4 amendment to a published presentation has given cause for pause here. In that report, the company says that "operators representing about 18% of our 4Q21 contractual rent and mortgage payments have stopped paying rent as of March 2022."
That follows previous reports of failure to pay by some operators, and the new report adds that collateral and security deposits are not covering the entire shortfall. And those shortfalls did not total near the 18% being reported now.
CEO says there's an "elevated risk" of more operators unable to pay the rent
While the company says it's working with operators to resolve the problems, the report did say this: "With many operators continuing to struggle with the impact of COVID on both occupancy and staffing, there remains an elevated risk that additional operators may be unable to pay in accordance with their contractual terms."
The update also includes a warning that as collateral is exhausted and rental revenue falls, "we expect this would further reduce our near-term adjusted FFO and FAD financial results."
FFO, funds from operations, is the REIT equivalent of earnings, and FAD refers to funds available for distribution. Despite the company's outstanding record of high-yield dividends, one does wonder now whether a cut will eventually come, perhaps sooner than later.
The chart below shows how well OHI was able to sustain and then grow adjusted FFO until later in 2021. Third-quarter FFO was $208.8 million, or $0.8467 per share, but then fell about 9% to $190.4 million, $0.7710 per share.
Here's some room for optimism
The company says there's room for optimism. In its 2021 annual report, CEO Taylor Pickett pointed to more than $800 million in investments closed last year, including 24 senior housing facilities leased to Brookdale Senior Living at an initial yield of 8.4%. Pickett also anticipates an improved labor and occupancy environment during the year and is anticipating a "strong" inflation-adjusted Medicare reimbursement rate that takes effect in October.
Even a reduced dividend could still provide a relatively high yield if it's a modest rollback. The average equity REIT yield is less than half of OHI's, and the beaten-down share price could be a buy signal if you believe the company can stem the bleeding from its client base.
Then, there's the big picture. "The pandemic has reaffirmed the importance of a robust and well-funded healthcare offering to support the elderly and frail, and we believe that, as low-cost, non-discretionary service providers, skilled nursing and assisted living facilities will continue to play a vital role in this continuum of care," Pickett says.
Of course, a dividend cut could well result in even more beating down of that share price. The chart below shows how that dividend payment has helped buoy OHI's performance in the past three years, including pushing the total return into sharply positive territory through much of 2021, even as share price growth flatlined.
So, is OHI becoming a yield trap? That would be a surprising development, given this company's solid balance sheet and long-term record. Only time will tell, and we should know more soon. OHI's first-quarter earnings release is set for May 2.