Health Care Company with 10 Percent Yield Offers Bounce-Back Potential

Paul Dykewicz | February 27, 2018

Omega Healthcare Investors Inc. (NYSE:OHI) is a real estate investment trust (REIT) in Hunt Valley, Maryland, offering an enticing 10 percent dividend yield that could tempt investors who expect the company to surmount financial setbacks and rising interest rates.

Despite the economy growing more strongly than it has in several years, Omega Healthcare’s management has been trying to guide the REIT through credit challenges incurred by a handful of its top 20 rent-paying operators. Even though REITs traditionally become less appealing to investors when interest rates rise, Omega Healthcare has demographics on its side as the aging “baby boomer” population, composed of those born between 1946 and 1964, increasingly will need the skilled nursing and assisted living facilities that the company offers through its roughly 1,000 properties.

I asked a key Omega Healthcare executive what caused his company to incur a financial slump at a time when economic growth has been on the rise.

Omega Healthcare Operators Facing Headwinds

“Our operators have been facing slow but steady revenue headwinds for a few years now as migration to Medicare Advantage has reduced reimbursement and length of stay,” said Matthew Gourmand, Omega Healthcare’s senior vice president of investor relations. “Recently, the very economic strength you refer to has resulted in higher wage cost inflation which has compounded the top-line pressures. While these headwinds are slowing and demographics are beginning to provide a tailwind, it might not be reflected in our stock until investors see these improvements.”

Favorable demographic trends for health care REITs are supported by the Census Bureau’s projection that the baby-boomer population will total 61.3 million in 2029, when the youngest in that cohort reach age 65. If those born before 1946 are included, people age 65 and older in 2029 will total 71.4 million, or 20 percent of the U.S. population, compared to just under 14 percent in 2012.

Based on significant industry analysis, Omega Healthcare found the use of skilled nursing facilities begins to increase more meaningfully at 75 years old and “accelerates each year thereafter,” Gourmand responded to a question I posed about the effect of baby boomers.

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