Omega Healthcare Investors Inc. faltered in the late 1990s after cuts to Medicare and Medicaid drained the business of clients.

As federal budget cuts rippled through the system, Omega reeled. Founded in 1992, the Hunt Valley-based real estate investment trust owned buildings it leased to operators of skilled nursing facilities.

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Several of its tenants went into bankruptcy. Income plummeted. The CEO and CFO left the firm. The board suspended its dividend. The stock fell under $2 a share in 2001.

Under new leadership, Omega recovered slowly by sticking with what it knew until about five years ago, when its business accelerated. Propelled by increased investor demand for medical real estate and changes wrought by health care reform, the trust's portfolio has more than doubled, from 256 facilities at the beginning of 2009 to 562 at the end of September.

A $3 billion deal announced Oct. 31 to acquire a similar Chicago firm would multiply its holdings again, bringing its properties to 874. Omega already is one of the top 50 owners of medical real estate across the country, according to a new ranking by Annapolis-based Revista, which tracks health care properties.

It's been a profitable enterprise, with income increasing to $172.5 million in 2013 from $73 million in 2009. In 2013, the firm, which employed 25 at the end of the year, generated more than $16 million in revenue per employee.

Its stock price is up about 26 percent so far this year, closing at $37.60 a share on Friday.

Omega CEO C. Taylor Pickett said the firm is seizing on consolidation and growth among its tenants to expand.

"Our strategy is very unique in that we have dozens of professional regional operators that are acquisitive and we are their source of capital," Pickett wrote in an email. "The key to the model is that the industry remains very fragmented and every year it becomes more difficult to operate the business without significant infrastructure, great management talent and market scale. For these reasons, we believe that consolidation of smaller local operators will continue at a rapid pace."

In some ways, Omega's story is not unique: Across the country, health care real estate is booming.

According to the National Association of Real Estate Investment Trusts, returns of the 15 health care REITs are up 27 percent so far this year, with an average dividend yield of 4.77 percent, the highest among the several sectors it tracks.

The senior housing and care sector has seen a rash of deals, worth $16.9 billion so far in 2014, compared to $15 billion in all of 2013 and $11.8 billion in 2012, according to New York-based Real Capital Analytics, which follows commercial real estate.

"Health care REITs, which traditionally have been this kind of niche asset class, have really gained a lot of steam over the past few years, and they've become major, major players in the sector," said Mike Hargrave, principal at Revista, which launched this year to collect data on health care properties.

Real estate generally has benefited from low interest rates, which have spurred firms to act before borrowing becomes more expensive. As low interest rates have suppressed returns from other types of conservative investments such as bonds, investors have steered more money into real estate. And within the sector, health care is seen as a strong growth play, boosted by the needs of an aging population.

"The entire health care system across the spectrum is going to benefit from demographics over time, and I think a lot of investors are looking at that," said Dan Bernstein, a Baltimore-based analyst with Stifel Nicolaus, which works with Omega on deals.

Investor demand has driven up prices for real estate, making it more attractive to health care providers to sell properties.

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Meanwhile, increasing competition and cost pressures, in part prompted by health care reform, are changing real estate needs, as hospitals release patients earlier, often into nursing care, and move more care into outpatient clinics. Some are responding to cost pressures by consolidating to achieve economies of scale.

"The whole system is going through a major change, partially driven by the Affordable Care Act and what [the Centers for Medicare and Medicaid Services] is doing, and now also being driven by the market," said Bob Kramer, CEO of the National Investment Center for Seniors Housing & Care, a nonprofit that provides information and education to investors in senior housing.

"It's creating new ideas about what kind of health care real estate is going to be more important and in what kinds of settings you can most efficiently deliver good outcomes."

Omega, which counts investment groups such as Vanguard Group, Cohen & Steers Capital Management Inc. and BlackRock Fund Advisors among its largest shareholders, is riding this wave.

So far this year, the firm has spent $47.5 million to purchase and upgrade properties. Pickett said the firm continues to look for small and medium-size acquisitions.

"Omega is a good example of how the REITs with the availability of capital in the public markets have been able to consolidate health care real estate," said Bernstein of Stifel Nicolaus.

Health care REIT assets grew more than 15 percent in 2013 and accounted for about 26 percent of the $280.4 billion market at the end of the year, according to Revista. Nonprofit operators owned most of the remainder, but their share could shrink in coming years, setting up a system more like the hotel industry, where many facilities have separate owners and operators.

In the long term, health care is becoming more like other commercial real estate, said Chuck Schilke, director of the real estate program and a senior lecturer at the Johns Hopkins University Carey Business School. The shift eventually could bring costs down for payers, as providers concentrate on care and outsource real estate, he said.

"On the one hand, Omega is a profit-seeking organization. On the other hand, a health care organization, which is just not interested in real estate and no good at managing it, is probably squandering tons of money," Schilke said. "Just looking at it as objectively as I can, because health care organizations are really not very well equipped to do this for the most part, my guess is, it's reducing costs."

Omega's portfolio, concentrated in skilled nursing facilities, sets it apart from other players, who have been leery of relying so heavily on operators dependent on the government for payments and moved into other sectors, such as bioparks and medical office buildings.

Medicaid accounted for 53 percent of the revenue of Omega's tenants at the end of June, while Medicare/insurance represented another 39 percent.

"Investors get antsy about skilled nursing," said Revista's Hargrave. "My personal feeling is that investors are a little too scared. … The operators are much more savvy in terms of operating efficiently and still providing great care."

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Pickett, who was CFO at Integrated Health Services, a chain of nursing homes that went bankrupt in 2000, said IHS ran into problems after using significant debt to finance its growth. Omega, which he has led since 2001, has been "very conservative with respect to leverage and very particular with respect to asset selection and growth," he wrote in his email.

The stock's recovery has paid off for investors and the firm's executives. Last year, Pickett was one of the state's highest paid executives, taking home more than $7.3 million, including $5.53 million in stock awards.

"It's been a great performer for me," said John Roberts, director of research for the Kentucky-based investment brokerage Hilliard Lyons. "I've been very happy with what they're doing."

The firm's deal to acquire Chicago-based Aviv would add new operators to its tenant list, opening a new pipeline of deals and marginally reducing its vulnerability to changes in federal reimbursement rates for nursing care, Fitch ratings agency analysts wrote in a report released after the deal was announced, which retained a stable BBB-minus — or the lower end of good credit quality — outlook on the firm.

Fran Kirley, CEO of Sykesville-based Nexion Health, one of Omega's operators, worked with Omega and other REITs after he started Nexion and wanted to grow rapidly. Nexion today operates 37 facilities in Louisiana, Texas and Colorado. Omega owned 19 of the properties at the end of last year.

"The challenge in the future is making sure that your assets and your operating capabilities are positioned well to handle a higher complexity of patients," Kirley said. "It will be an interesting couple of years in our business."

Omega is betting the government is not going to risk the turmoil of the late 1990s with similar cuts to Medicare and Medicaid.

"We believe that reimbursement rates will remain stable for the foreseeable future," Pickett wrote. "The current system is very efficient and there is no doubt that [skilled nursing facilities] are the low-cost setting for the care that is being delivered."

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