Omega Healthcare announced disappointing fourth quarter results on February 13. Most notably, after more than 20 consecutive increases to its quarterly dividend, management stated that the company’s payout would remain at its current level (66 cents per share) in 2018 rather than move higher.
Here were some comments made by Omega’s CEO:
“As a result of our strategic repositioning activities, 2018 will not be a growth year, and therefore, we do not expect to increase the dividend during 2018. However, I want to be very clear that we are confident in the payout percentage coverage and sustainability of our current quarterly dividend.”
Regarding dividend coverage, Omega’s 2018 guidance for adjusted funds from operations (AFFO) per share calls for a decline of about 9% compared to 2017. AFFO is similar to free cash flow for a REIT, and Omega expects 2018 AFFO per share of $3.01 at the midpoint of its guidance. That compares to the company’s annual dividend of $2.64 per share and represents an expected AFFO payout ratio of 88%, which is high but not overly alarming for most healthcare REITs.
However, Omega’s thesis appears to be showing further cracks as “healthcare delivery rapidly evolves” and impacts the health of operators in the skilled nursing facilities space. Management is selling off assets ($300 million potential dispositions expected in 2018) to rid the company of more troubled tenants and hopes to redeploy that capital into more attractive properties by year end to build a stronger stream of cash flow. The ultimate timing and success of this strategic repositioning plan is unknown.
With uncertainty continuing to rise across most of the healthcare sector, the company’s dividend growth halted for now, and increasing risk of more tenant problems in the future, Omega does not seem like an appealing income play for very conservative investors.
That’s especially true with many other high-yield stocks across the real estate and utilities sectors selling off over the last two months as interest rates have increased. Many of these companies face less uncertainty, have better dividend safety profiles, and can deliver dividend growth in excess of the rate of inflation.
So are you planning to exit or continue holding OHI? It seems their troubles have been priced into the stock and with a 10% yield, it might be worth holding on through the restructuring. I like the fact that management is taking aggressive steps now rather than waiting until the Medicare and senior housing infrastructure crumble further. Any thoughts?
I have the same question as idtheodd.
I have the same question as idtheodd. Your article is strangely ambiguous. Hold or sell?
Id agree the stock looks stable at a multi year low and management sounded confident on the call. I’d agree it’s not for ultra conservative investors but has upside since the issues are factored into the price.
I’m planning to hold this myself, acknowledging the risks. Even a 50% dividend cut would leave a residual 5% yield, but continuing to hold after a cut is clearly against every principle of DGI I try to follow! OHI is a tough one! I’m no expert, but it seems to me the baby boom wave is going to continue to create demand for more nursing home beds as time goes by. And Congress is eventually going to have to (successfully) address this issue as well as healthcare in general. Also, can a REIT suspend dividends altogether? I suspect that’s possible, and even guaranteed, if AFFO is negative.
Read the newsletter, Tony. You will find the answer.
The newsletter did indeed answer the OHI question. I posted this before it came out.
OHI is still good for a moderate (not conservative) investor like me. Right now OHI trades at just under a 10% dividend. Even if you imagine a hypothetical scenario where OHI cuts the dividend by 20%, that would still leave a pretty impressive 8% dividend. Long term, I expect growth to come to the health REIT sector. I can afford to hold my position and get paid handsomely while I wait for growth. I expect OHI to be able to hold it’s dividend as it strengthens its tenant base. Even if I’m wrong, a small dividend cut would still leave me with very nice income.