Omega Healthcare Investors (OHI) is a Real Estate Investment Trust (REIT) with a high 6.9% dividend yield. It also offers attractive price appreciation opportunities considering its leadership position in the high growth Skilled Nursing Facilities (SNF) industry. Further, a variety of valuation and risk metrics suggest the dividend is relatively safe and likely to grow.If you are comfortable with the unique risks of an SNF REIT, Omega currently offers an outstanding opportunity to buy in at a very attractive dividend yield.

(data source: Google Finance)

(data source: Google Finance)

About Omega Healthcare Investments
Omega provides financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities. Skilled Nursing Facilities (SNF) are healthcare institutions that provide around the clock care to patients by trained nurses. As of September 30, 2015, the company’s portfolio included over 900 properties located in 42 states (and the UK) and operated by 83 different operators. Over the last 1-year period, the total return on Omega has been negative 19%, and we believe this offers an attractive margin of safety due to the company’s unique opportunities, valuation, and risk exposures. 

(Total Returns, data source: Yahoo Finance)

(Total Returns, data source: Yahoo Finance)

Unique Opportunities and Risk Exposures
Unlike many of its healthcare REIT peers, Omega is a pure-play SNF REIT. This uniqueness creates opportunity and risk. Generally speaking, SNF REITs are more risky than other types of healthcare REITs (e.g. medical office building REITS, senior living property REITs) because of their dependence on Medicare and health insurance. Government cuts to Medicare and health insurance programs can have a very negative impact of SNF REITs such as Omega. For example, the following excerpt from Omega’s most recent 10K describes the risk:

Changes in the reimbursement rate or methods of payment from third-party payors, including the Medicare and Medicaid programs, or the implementation of other measures to reduce reimbursements for services provided by our operators has in the past, and could in the future, result in a substantial reduction in our operators’ revenues and operating margins… which could cause the revenues of our operators to decline and negatively impact their ability to meet their obligations to us.

As a specific example, on January 3, 2013 the American Taxpayer Relief Act cut future payments to SNF’s by approximately $600 million (10K, p.22). As another specific example, just last week Kindred/Rehab Care agreed to pay the US Government $125 million for causing an SNF customer to bill for unreasonable and unnecessary rehabilitation therapy. Because of the unique risks of the industry, many of Omega’s peers have limited their exposure to SNF properties. For reference, the following chart shows Omega is the largest owner of SNF properties.

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