Triple Net Leases
Omega Healthcare Investors (NYSE: OHI) owns nursing homes. 2020 was a rough year for the senior housing operators that REIT Omega Healthcare counts as tenants. The REIT managed to survive the pandemic despite low occupancy rates. In fact, Omega was able to maintain its dividend despite the pandemic. How?
It is a result of its triple net lease business model. A triple net lease requires a tenant to pay the landlord rent and to be directly responsible for property taxes, insurance, and maintenance. They are often found in conjunction with a sale of real estate, followed by a lease back of the same property by the seller so that the seller can continue in his/her business. Essentially, Omega just collects the rents due before operating costs. That rent still has to be paid to the related entity even if there is not enough funds for staff and supplies. At this point, there are three tenants that are having trouble making rent.
Triple net leases can be a legitimate investment vehicle. The appraised value are often manipulated by fraudulently altering the terms of the lease or misrepresenting the economic strength of the future tenant.
In Omega’s second-quarter earnings conference call, management claimed occupancy in its portfolio at around 75.7%. That was an improvement from 72.3% in January. The more patients in a facility, the more revenue. That improves the ability of tenants to keep paying their rent and hopefully provide enough staff to meet the residents’ needs. CEO Taylor Pickett warns:
“We need occupancy to return over 80% in order to meaningfully mitigate the cash flow reductions from a pandemic.”
Notably, when the REIT announced fourth-quarter 2019 earnings, occupancy was at 83.4%, up 1.1 percentage points over the same period of 2018. Omega will be fine. Residents at their facilities may need more staff.