The stock market is gyrating in unsettling ways lately. After setting all-time highs, stocks have pulled back with large daily swings that do little to settle the stomach.
However, instead of sitting and watching this turbulence, you could go another direction by investing in Omega Healthcare Investors (NYSE:OHI). The slow and steady trends underpinning this real estate investment trust’s (REIT) business and stock could be the emotional balm that keeps you invested even during hard times for the broader market.
Holding up in a storm
Roughly 83% of Omega’s business is tied to nursing homes, with the rest related to other forms of senior housing. In 2020, that was not good news, given that the novel coronavirus spreads easily in group settings and the risk of death increases with age. Against that backdrop, you’d expect the real estate investment trust to have had a bad year. But it didn’t: Adjusted funds from operations (FFO) were actually up 5%. That trend continued into the first quarter as well, with adjusted FFO higher by 7.5% year over year.
A key piece of the puzzle here is that Omega’s properties are leased out to others under long-term contracts. These leases often include annual rent increases and, more importantly, require the tenants to pay for most of the costs of the properties (things like building upkeep and taxes). Called the net-lease model in the industry, this is generally considered a low-risk way to invest in real estate. That has been on display during the coronavirus pandemic.
A REIT, however, is only as good as its tenants’ abilities to pay. Which is also interesting, because Omega’s lessees remained in solid financial shape given the health backdrop they were operating against. Part of that was related to government assistance, which helped nursing home and other senior housing operators deal with the impact of the coronavirus. Unlike some of its healthcare REIT peers, Omega was able to maintain its dividend throughout 2020. At recent prices, it offers a huge 7.4% yield.
On Omega’s first-quarter earnings conference call, the REIT’s top brass noted that it expects government assistance to continue. And, assuming that’s the case, there’s little reason to worry about the dividend. So while the market goes up and down, income investors can instead concentrate on the fat quarterly dividend checks they are collecting from Omega.
But there’s more to this story. Nursing homes are not generally places people go because they want to. A resident usually enters after a hospital stay because the care they need is greater than can be provided in any other setting in a cost-effective manner. In fact, despite the push to provide more senior care in the home setting, more people are released to nursing homes than any other setting.
Meanwhile, nursing homes are generally paid for by Medicare and Medicaid. Omega’s private-pay customers account for just 11% of its average facility’s rents. While the government can, and has, changed its pay structures, it remains a reliable payer on a month-to-month basis (a fact that the coronavirus proved). So there’s a reason to like this fact, even though it comes with a bit of uncertainty for operators. All in all, Omega’s business and dividend-paying ability have strong foundations.
Looking forward, meanwhile, there’s a huge demographic tailwind that will slowly but surely help Omega’s business over the long term. Put simply, the giant baby boomer generation keeps getting older every single year. And as people age, they need more care. For example, the number of 65-and-older adults in the United States is expected to increase 44% over the next 20 years. That should lead to a sizable increase in demand for nursing homes, no matter what is happening on Wall Street.
Time for a deep dive
Omega is hardly perfect (no stock is), but if market turbulence is too much for you it could be a nice addition to your portfolio. You can stop worrying about the ups and downs of the ticker tape, and focus on dividend checks and multi-year demographic trends that are going in a direction that will benefit Omega and its shareholders. That’s the kind of distraction that any investor could learn to love at a time of increasing stock market uncertainty.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.