Omega Healthcare Investors (OHI ) is one of the highest yielding REITs, with an 8.0% current dividend yield. It has rallied 30% in the last four months, mostly thanks to positive results in its last two earnings reports and improved guidance. Such a rally is likely to deter most investors from purchasing this REIT. However, while the stock may lose steam in the short term, as it cannot keep rising in a straight line, it still has the potential to offer great returns to long-term shareholders.
Omega Healthcare is a healthcare REIT that generates 83% of its revenues from its skilled nursing facilities and 13% of its revenues from senior housing developments (4% comes from ‘other’). Before its recent rally, Omega Healthcare had dramatically underperformed the market for two reasons. First of all, as interest rates are on the rise, investors can find decent yields elsewhere and hence the yields of REITs become less attractive. As a result, their valuation comes under pressure. REITs and utilities are the most vulnerable holdings to rising interest rates.
Moreover, Omega Healthcare underperformed for another reason. Two of its tenants, Orianna, and Preferred Care are in bankruptcy. While Preferred Care was a small tenant, whose lost revenues could be easily absorbed, Orianna was the 5th largest tenant, with annual contractual revenues of $47.3 M. To provide a perspective, Omega Healthcare has posted revenues of $881 M in the last 12 months. The REIT is doing its best to transition the Orianna facilities to new tenants but the issue continues to exert a drag on its results.
However, investors should realize that this is a temporary headwind, which will fade in the upcoming quarters, while the long-term growth prospects look strong for Omega Healthcare. As the baby boomer generation ages and the average life expectancy is on the rise, the senior population of the U.S. is expected to significantly grow in the upcoming years. In addition, elderly people have the highest spending power, as their average net worth exceeds $640,000 per capita. As a result, healthcare spending is expected to grow by 72% in the next seven years, from $3.2 T this year to $5.5 T in 2025. This trend certainly bodes well for the growth potential of Omega Healthcare.
