Is Omega Healthcare Stock’s Big Dividend Safe? (NYSE: IHO)

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Omega Healthcare Investors, Inc. (NYSE: IHO) is known for its mouth-watering dividend yield of over 9% which it managed to maintain and even grow for decades, notably during the Great Financial Crisis and the COVID-19 crash.

That said, the sky-high dividend yield, issues with some of its tenants, and tight AFFO payout ratio mean dividend safety is no guarantee. We’ll go into that in more detail in this article and discuss whether investors can count on this dividend come hell or high water as they have in the past.

Tight payout ratio

In 2021, OHI actually had a pretty reasonable AFFO payout ratio of 85.4%. However, this year analysts expect the payout ratio to tighten significantly to 97.5% without considering dividend growth per share and management said on the call that in the first quarter , its payout ratio was 103% of funds available for distribution, implying that competing targets for its cash flow were consuming too much for OHI to fully cover its dividend without dipping into its cash.

Although this course is obviously not sustainable, next year it should improve a little as the AFFO per share is expected to improve by 4.2%. This should give investors some leeway.

Balance sheet and real estate portfolio

Additionally, it is important to remember that OHI is rated investment grade (although barely rated BBB-), has ample liquidity and its cash flows are generally quite stable thanks to the fact that 97% of its revenues are linked to long-term triple net leases with weighted average fixed indexations of 2.3%.

It has more than $1 billion in total cash available at the end of the first quarter, with no major maturities this year. It also has an adjusted fixed expense ratio of 4.1x, which leaves it in a solid financial position at the moment. Of concern is its rather high debt-to-adjusted EBITDA ratio of 5.3x, which is above its target range of 4.5x-5.0x. However, it still has a stable outlook from S&P on its investment grade credit rating, so it should be good at that level for a while. It has more than enough liquidity to manage debt maturing in 2023 and 2024 in the event that it is unable to refinance these notes on reasonably attractive terms.

Meanwhile, its leases have an average remaining term of 9.4 years, with 98% of its portfolio expiring occurring after 2024 and 93% occurring in 2027 or later.

Industry trends

The company is currently facing headwinds including increasingly tight EBITDARM and EBITDAR coverage ratios (1.48x and 1.14x, respectively) due to lower Medicare reimbursement rates, lower occupancy rates due to demographics and increasing wage pressures.

That said, the demographic trends of the next few years should strongly reverse this trend and create a growth momentum in attendance for OHI. The 65+ pool is expected to grow from 56.1 million in 2020 to 65.2 million by 2025 and reach 73.1 million by 2030, thanks to the aging of the baby boomer generation. This leads some analysts to expect demand for skilled nursing facilities (SNF) to exceed supply by 2030, with utilization rates rising from 76% in 2021 to 101% by 2030. and 116% by 2040. This means that the IHO should have opportunities for growth. its portfolio profitably over the next two decades.

Until this turnaround takes full effect in the coming years, OHI benefits from significant diversification, with 938 properties and 64 operators in 43 states and the UK. It also benefits from the fact that virtually none of its leases will expire before this demographic shift takes effect, so it shouldn’t suffer from idle properties during this time unless one of its tenants does. bankruptcy.

Operator issues

This brings us to the last major risk the company currently faces: that operators representing 15% of OHI’s contract rents and mortgage payments will stop paying from March 2022. However, operators representing around 91 % of OHI’s second quarter contractual rent and mortgage payments paid rent in April 2022. Management has stated that as a result, it expects funds available for distribution in the second quarter to increase by approximately 7%. While this indicates a positive trend, management had this to say in its June investor presentation:

We continue to work diligently to resolve our outstanding operator issues. However, until we reach agreements with these carriers, the final resolution to these carrier issues is unknown. Additionally, as many operators continue to grapple with the impact of COVID-19 on occupancy and staffing, there remains a high risk that other operators may not be able to pay on their terms. contractual.

They also had this to say on their first quarter earnings call:

I think in terms of calling the bottom [in terms of cash flow paid to us by our operators], it’s fair to call the bottom when it comes to the operators we’re talking about, but we still have to be wary of the next two quarters. And I would point out… the revenue side of the equation for our operators. And when the — if the health emergency isn’t extended beyond July, that will create additional pressure.

We are therefore satisfied with the resilience of the portfolio and the training that the team has been able to carry out. But I’m still – I would like to point out that we’re not there yet, but as far as these operators go, I think we’re in pretty good shape…

There are a few struggling small operators that we have had discussions with. There are no full-size carriers we are having issues with from a payment perspective. So it’s hard to predict the future, as we said there are still challenges and a number of things on the horizon including the return of occupation, labor costs work, all the things that we discussed that are still challenges for our industry and we kind of have to navigate the next few quarters. But to predict what percentage it is would be to throw darts.

Key takeaway for investors

With its sky-high dividend yield and implied capitalization rate, OHI is clearly trading at an attractive value. With a well-diversified portfolio and a proven management team that has delivered exceptional long-term total returns and shareholder dividend growth, OHI looks like a slam dunk buy here.

That said, its dividend coverage ratio is extremely thin at the moment due to low occupancy rates and operator solvency issues. If management manages to navigate next year without having to cut its dividend, it should be in decent shape as occupancy rates rebound due to a continued decline in headwinds from COVID-19 and demographic trends. increasingly favorable.

Given its over $1 billion cash position, well-laddered debt maturity profile, recession-proof business model, lack of significant interest rate exposure floaters, little to no lease expiries for several years and additional cash from its asset sales, OHI looks as if it has more than a 50% chance of getting to the other side of the current headwinds without having to reduce its dividend.

That said, it’s far from a SWAN “sleep well at night” investment here. Investors looking for a conservative income play should look elsewhere, while more aggressive investors who are willing to hold on to declining dividends for the recovery on the other side should find considerable value here. We rate the shares as a highly speculative buy.

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