Health care REIT Omega Healthcare Investors (OHI) reported worse-than-expected third quarter earnings at the end of October which resulted in a steep drop in the company’s share price. Omega Healthcare Investors dividend is one main reasons folks own a stock like this.

However, the Omega Health Care Investors dividend is now in question as the earnings revealed (temporary) problems with one of its tenants, Orianna Health Systems, and lowered its full-year AFFO guidance as a result. The market currently seems to price a dividend cut into the REIT’s valuation.

Lack of a rebound in valuation can be a chance to get long, and we do not blame investors for taking a stab here. But the dividend, and the years of hikes, are in jeopardy

Omega Healthcare Investors dividend is being called into question as the company recently revealed that one of its tenants, Orianna Health Systems, was burdened by low occupancy rates which in turn led to a major impairment charge related to the existing direct financing lease totaling $194.7 million.

As a result, Omega Healthcare Investors dividend is questioned because the company reduced its full-year 2017 adjusted FFO guidance from $3.42-$3.43/share to just $3.27-$3.28/share. A lowered AFFO guidance is never a good thing. Ever. Period. End of article. As such investors reacted the way you would think, and sold the stock. But now the dividend is being questioned.

many believe that the lack of a rebound in the weeks after the health care REIT reported disappointing third quarter results is a good opportunity to open up a long position, or dollar cost-average. However, the Omega Healthcare Investors dividend is in jeopardy. This is reflected in the fact that the market will not bid the stock up. It appears to be increasingly concerned with Omega Healthcare Investors’ dividend prospects.

One bullish note is that Omega Healthcare Investors’ operator schedule shows that the health care REIT is very well diversified, suggesting that the company can handle operator troubles, such as Orianna Health Systems.

Based on the information provided in Omega’s earnings release, Omega Healthcare Investors is able to deal with the Orianna fallout as it has moved a part of its portfolio to other operators. Right now, enough cash is coming in for the divided to at least be maintained, but we question the viability of this approach, specifically with so much uncertainty in the sector. Because of what we are seeing, we are questioning the dividend.

Keep in mind that the health care REIT at this point has raised its quarterly cash dividend for 21 consecutive quarters straight. A big promise of an investment in Omega Healthcare Investors is that the company will continue to grow its dividend payout by $0.01/share each quarter. However, the writing is on the wall that the Omega Healthcare Investors dividend cannot be raised like this forever with present performance.

Omega reported a net loss for the three-month period ended September 30, 2017 of ($137.5) million, or ($0.67) per common share. Funds From Operationsfor the quarter was a deficit of ($46.8) million or ($0.24) per common share and Funds Available For Distribution (“FAD”) was $150.6 million.

Bob Stephenson, Omega’s Chief Financial Officer commented:

“During our second quarter earnings call, we stated we were closely monitoring one of our operators and may have to place them on a cash basis for revenue recognition if their performance did not improve. Since Orianna did not achieve their revised operating plan and pay their full contractual rent, we placed them on a cash basis and therefore our third quarter results, including AFFO and FAD, do not include any revenue related to Orianna.

Since 93% of our Orianna portfolio was classified as a direct financing lease, placing them on a cash basis and initiating the process to transition some or all of their portfolio to new operators also required us to record several large provisions related to the direct financing leases during the quarter.”

With this news, we question whether the pace of the dividend can be held.  A lot of cash is being spent. The company made $239 million of new investments in Q3 2017. Most notably there was the acquisition of 15 skilled nursing facilities (“SNFs”) for approximately $191 million from two unrelated third parties. The 15 Indiana SNFs with approximately 2,074 beds were added to the existing operator’s master lease with an initial annual cash yield of 9.5% and 2.5% annual escalators.

While the deal will take time to see a benefit, we believe enough cash will be generated to at least cover the present dividend going forward, despite FFO and AFFO falling. That said, we believe the dividend hikes will not last forever at the same pace, and as such we think it is in jeopardy of being maintained, or raised at a much lower rate. A cut is not impossible, but highly unlikely.

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