Can This 8.6%-Yielding REIT Outmaneuver COVID-19?

Before I started working as an analyst, I was in a completely different field – assisted living care.

As fulfilling as it was, it was never an easy industry to work in.

Today, we’re going to explore whether it – and one company in particular – is a worthwhile industry to invest in.

The challenge with assisted living care facilities (and the companies that run them) is that steady revenue is contingent on keeping rooms full.

This problem reared its head like never before during the pandemic, which struck retirement home occupancy particularly hard.

A company that knows this struggle well is real estate investment trust (REIT) Omega Healthcare Investors (NYSE: OHI), which owns the real estate for 944 assisted living and skilled nursing facilities in the U.S. and U.K.

It makes money by collecting rent checks from assisted living facilities that rent its properties.

When we rated Omega a little over a year ago, it earned itself an “A.” Back then, it sported a 7.2% yield. Now it has an 8.6% yield.

That’s an attention-getting number. But with the retirement home market still struggling through the pandemic, it’s worth looking to see whether this dividend is still as safe as it was before…

The company recently said occupancy levels in its assisted living facilities are still meaningfully below pre-pandemic levels. And it’s not hard to see why…

As of March 2021, nearly 1 in 12 long-term care residents died from COVID-19. For nursing homes alone, 1 in 10 residents lost their lives to COVID-19.

Plus, with new variants popping up constantly, it’s harder to justify sending your loved ones to live where you’re unsure they’re safe.

At the end of the day, assisted living facilities need to fill beds to pay landlords like Omega. And if their revenues are disrupted dramatically, it will impact Omega.

And that’s exactly what’s playing out right now…

Seeing as Omega is a REIT, it’s more beneficial to look at its funds from operations (FFO) rather than earnings or cash flow.

The company had been building up its FFO for years. It recorded $444.3 million in 2017, $587.4 million in 2018 and $640 million in 2019… and then it saw a dip to $555.9 million in 2020.

In 2021, Omega’s estimated funds from operations rebounded to $755.1 million.

However, it achieved that rebound by applying security deposits, issuing letters of credit and using other financial avenues in order to help tenants make rent.

Omega has cautioned that once those options dry up, FFO will not look so bright.

In more bad news, Omega’s payout ratio was 110.15% in 2020. That’s above the 100% line SafetyNet Pro is okay with for REITs, so Omega received a penalty there.

But there’s also a decent amount of good news…

Omega shrank its payout ratio to an estimated 84.81% in 2021, and it’s never cut its dividend over the last 10 years (but it has also never raised it). Furthermore, dividends rose from $612.3 million in 2020 to an estimated $640.4 million in 2021.

All in all, Omega is a mixed bag.

It faces a looming threat of tenants soon not being able to pay their rent… and there’s no telling when the industry as a whole will bounce back.

Omega has been successful in diversifying its business to pump up its funds. It also supplemented some of its loss by selling off a couple of its facilities – placating investors for now.

Some of the solutions the company came up with to its problems feel more like Band-Aids rather than real fixes…

In the short term, however, it looks like this dividend is moderately safe.

Dividend Safety Rating: C

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