We recently discussed Omega Healthcare Investors' (NYSE: OHI) dividend. About a month ago, Omega Healthcare Investors had made its most recent dividend announcement. The 1.5% dividend increase had brought the quarterly payout to $0.66 per share. That said, the yield is on the rise, and is up to 9.5% now as the stock is selling off following earnings. In this column, we discuss earnings and the ramifications. Moreover, we revisit the issue of dividend safety with this popular real estate investment trust.

Quarterly highlights

So just how was the most recent quarter. Well, income was in line with our expectations, but we have to tell you that rentals were a bit weak. Let's discuss the results, for the quarter which ended on December 31, 2017, Omega Healthcare Investors reported net income of $65.2 million, or $0.31 per common share, on operating revenues of $221.2 million. This is a sizable decline from what we saw last year. In fact, it is a pretty sizable decline. The year-over-year decline was on the order of 50%, as the present results compare to net income of $129.9 million, or $0.63 per common share last year. This decline comes despite operating revenues only falling slightly from the $234.5 million, for the same period in 2016. For the year, things were not much better.

Annual numbers

For the twelve-month period ended December 31, 2017, the Company reported net income of $104.9 million, or $0.51 per common share, on operating revenues of $908.4 million. This compares to net income of $383.4 million, or $1.90 per common share, on operating revenues of $900.8 million, for the same period in 2016.

Why the decline?

Why the decline? The decrease in annual net income compared to the prior year was primarily due to $198.2 million in impairments on direct financing leases related to the Orianna Health Systems portfolio, $40.6 million of reduced revenue resulting from placing Orianna and Daybreak on a cash basis in 2017, and incremental increases of $40.3 million in impairments on real estate assets, $24.7 million in interest expense, $20.5 million in depreciation and amortization expense, $19.9 million in interest refinancing costs, $4.7 million in provisions for uncollectible accounts and $1.8 million in general and administrative expenses.

This decrease in net income was partially offset by $48.2 million of increased revenue associated with new investments completed in 2016 and 2017, $3.7 million in increased gains on the sale of assets, a contractual settlement of $10.4 million recorded in the first quarter of 2017 and a decrease of $9.6 million in acquisition costs.

We should look at fund from operations

While much of the weakness was explained above, we care about dividend coverage in light of this weakness. To examine whether a dividend is safe, we want to look at funds from operations. 

In the quarter, funds from operations were $159.2 million, or $0.77 per common share compared to $171.5 million, or $0.84 per common share last year. This includes the impact of $3.9 million of non-cash stock-based compensation expense, $0.9 million in provision for uncollectible accounts and $0.2 million in impairment on direct financing leases, offset by $0.5 million in one-time non-cash revenue. Taking into account adjustments, adjusted funds from operation was $163.7 million, or $0.79 per common share, compared to $180.4 million, or $0.88 per common share, for the same period in 2016.  There is a real decline here. However, the dividend is safe.

The dividend is secure and we're buyers

With adjusted funds from operations of  $163.7 million, or $0.79 per common share, the dividend was covered. At the new rate of $0.66 per share, adjusted funds from operations, as long as they remain around current levels, more than sufficiently cover the dividend. While interest rate fears wreak havoc on the name, we think you can consider acquiring shares at this low price.