What to Buy: Omega Healthcare Investors Inc (NYSE: OHI)

Why to Buy Now: This month, we decided to continue our flight-to-safety theme by diversifying away from the energy sector, at least until OPEC finally blinks and decides to cut production.

So once again, we decided to tilt toward the lower end of the high-yield spectrum, with a healthcare real estate investment trust (REIT) whose $0.52 quarterly distribution ($2.08 annualized) has a forward yield of 5.5%. This REIT’s distribution is well supported, with a trailing 12-month payout ratio of 73.6%.

Omega specializes in providing financing and capital to the U.S. long-term healthcare industry, with a focus on skilled-nursing facilities (SNF).

And given the demand aging baby boomers will place on the healthcare system, many payors will likely opt for skilled-nursing facilities’ relatively low cost of care over pricier alternatives.

Omega’s core portfolio consists of long-term leases and mortgage agreements. Its leases are “triple net,” which means tenants are required to pay for all property-related expenses, including real estate taxes, insurance and maintenance.

At the end of the third quarter, Omega owned or held mortgages on 562 skilled-nursing facilities, 21 assisted-living facilities and 11 specialty hospitals, with nearly 64,000 licensed beds located in 37 states and managed by 50 third-party healthcare operating companies.

Toward the end of October, Omega announced a merger with Aviv REIT Inc (NYSE: AVIV) in a unit-for-unit transaction that values the latter at $3 billion, a 16% premium to its closing price prior to the announcement. The combined entity will offer investors the premier pure-play skilled-nursing facility REIT.

Management expects to continue making bolt-on acquisitions in what is a highly fragmented industry. Omega’s roll-up strategy coupled with the tailwind from aging boomers should lead to continuing growth over the long term.

And with a price to funds from operations (P/FFO) per unit ratio of 13.6 compared to a North American healthcare REIT industry average of 15.3, Omega offers good value at current prices.

Omega Healthcare Investors is a buy below 39.