You can see that both measures have been fairly steady the last five quarters.Management argues that the challenges faced by Orianna are specific to that operator rather than the broader industry. That means that should 10-year Treasury yields rise by about 2%, as the Federal Reserve is projecting through the end of 2019, then Omega Healthcare’s dividend yield might rise to as high as 10%.This means that management is being good stewards of investor capital, only taking on new debt or selling new shares if they have a profitable investment opportunity that will ultimately grow long-term shareholder value.That’s why it’s been raising the dividend each quarter by just a penny, which, assuming the trend continues, would mean that 10 years from now it would be paying an annual dividend of $4.12 per share. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. This prediction for the OHI next dividend date is extrapolated from past data and therefore may or may not be useful as a future predictor depending on company-specific circumstances. Specifically this means that Omega is careful to only buy a new property, partly funded by the dilutionary sale of new shares, if the REIT’s AFFO per share will increase as a result, and thus allow for continued dividend growth.For example, if the Senate GOP version of the healthcare reform bill were to pass, Medicaid funding would likely fall, potentially hurting Omega’s senior housing tenants.Founded in 1992 in Hunt Valley, Maryland, Omega Healthcare Investors is America’s largest SNF and senior housing REIT, with 972 properties rented to 77 operators across America and the UK. I’ll be watching next quarter to see if the cracks from this summer remain isolated to one or two problem tenants or seem like they are spreading into an industry-wide issue.With approximately 90% of portfolio lease expirations occurring after 2021, Omega’s cash flow visibility to support the dividend is also solid so long as operators’ financial health does not deteriorate (combined EBITDAR coverage of leases expiring through 2021 was a reasonable 1.36x at the end of 2016, consistent with last quarter’s level).Investors were growing worried about the SNF industry even before the various health and tax bills proposed this year.Perhaps the strongest argument supporting overall industry stability (for now) is the overall trend in operator occupancy and EBITDAR coverage over the last year.
We view these as long-term headwinds that stronger operators should be able to manage given they are fairly well-telegraphed.”Source: Omega Healthcare Investor PresentationAt today’s price, investors have potential to achieve long-term annual total returns in excess of 10% (7.4% yield + 5% annual growth), assuming the company is not materially affected by regulatory changes (especially around reimbursement rates) and SNFs continue to capture a similar proportion of the aging senior population.While federal policy is still characterized by a healthy dose of uncertainty today, we believe new legislation will likely be relatively more incremental, phased in over a long period of time, and will not result in bankruptcies like those that occurred over 15 years ago.This kind of strong, long-term consistency is thanks to two protective factors. ).With that said, legislative and regulatory changes, especially surrounding reimbursement amounts, can significantly impact the profitability of Omega’s somewhat-fragile tenants going forward.Several of Omega’s tenants are under financial pressure, which caused the company to place one of them (Orianna Health Systems) on a cash basis for accounting purposes after the operator continued missing its budget and failed to pay its monthly rent obligations.Omega Healthcare also placed a non-top 10 operator, Daybreak, on a cash basis in September due to a short-term liquidity crunch the company faced; however, Daybreak is expected to pay full rent starting in January and is not comparable to Orianna’s situation.Brain, another good analysis.
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