Omega Healthcare Stock: Interest-Rate Cuts Make This 7.2%-Yielder a Compelling Play
August 2, 2024
OHI Stock Hits New Record High
Interest-rate cuts are coming. Granted, the Federal Reserve probably won’t start cutting interest rates when it meets at the end of July, but Wall Street is 100% certain the Fed will announce its first 25-basis-point rate cut in September.
That’s expected to be just the beginning, too, with at least one more rate cut coming before the end of the year and several more expected in 2025.
Stocks are already at record levels, but upcoming rate cuts are ramping up investor optimism, which should help the broader markets hit fresh highs.
Why the enthusiasm?
The unemployment rate remains low, at 4.1%, inflation slowed to 2.7% in June, and the labor market continues to cool. This data suggests that things are going in the right direction and the Fed will begin cutting interest rates.
Cutting interest rates too quickly could reignite inflation, but, should the Fed lower rates and achieve the much-lauded “soft landing” that involves reducing inflation and avoiding a recession, stocks could rip higher.
History is on the side of the bulls. Going back 40 years, stocks typically rally leading up to the first rate cut, consolidate for one or two months after that, and then trend higher after a recession has been avoided. (Source: “iCapital Market Pulse: Market Consolidation and the Great Rotation,” iCapital, July 18, 2024.)
Which defensive stocks have performed best in this scenario?
That’s be stocks in the health-care, utilities, and consumer staples industries.
But, with interest rates poised to fall, real estate investment trusts (REITs) should also be on your radar.
Lower rates make it cheaper to borrow, which should help improve profitability for REITs. And, thanks to their high dividend yields, they will probably become more attractive than bonds.
One great REIT that is also a defensive play is Omega Healthcare Investors Inc (NYSE:OHI) a triple-net, equity REIT with a portfolio of senior care centers, skilled nursing, and assisted-living facilities.
Omega Healthcare is the largest REIT focused on skilled nursing facilities (SNF) . The company’s $9.9-billion real estate portfolio includes 866 facilities in the U.S. and U.K. Its 73 operators are responsible for 84,385 beds. (Source: “Investor Presentation June 2024,” Omega Healthcare Investors Inc, last accessed July 24, 2024.)
While Omega Healthcare is a great company, health care wasn’t the best industry to be in during the 2020 health crisis. The health-care sector, especially nursing homes and care facilities, took a hit in 2020, and Omega was no exception.
Health-care facilities like Omega Healthcare implemented new and evolving protocols to limit the spread of COVID-19. Still, between February 2020 and January 2021, occupancy declined by approximately 13%.
Lower revenue and higher operating costs (to combat the pandemic) negatively impacted earnings and drove the share prices of health-care REITs lower.
On the plus side, occupancy rates are up nine percent from their January 2021 low at 79.6%.
Omega itself has already collected roughly 91% of its first quarter 2024 contractual rent and mortgage payments from its operators.
Industry tailwinds suggest that those occupancy rates will climb significantly higher. Aging Baby Boomers are expected to drive a multi-decade increase in demand for large, skilled nursing facilities. Over the next 20 years the number of adults aged 65+ is projected to increase 44%.
First-Quarter Results Exceed Expectations
For the first quarter ended March 31, 2024, Omega announced that net income almost doubled to $69.0 million, or $0.27 per share. (Source: “Omega Reports First Quarter 2024 Results and Recent Developments,” Omega Healthcare Investors Inc, May 2, 2024.)
Nareit funds from operations (NAREIT FFO) increased five percent to $153.0 million, or $0.60 per share. Adjusted funds from operations (AFFO) climbed 10% to $176.0 million, or $0.68 per share.
For income investors, the all-important funds available for distribution (FAD) were up 10% at $168.0 million, or $0.66 per share.
During the quarter, Omega Healthcare’s completed $75.0 million in new investments, issued one million shares for gross proceeds of $33.0 million, sold four facilities for $10.0 million, and repaid $400.0 million in senior unsecured notes on April 1, 2024.
Commenting on the first-quarter results, Chief Executive Officer Taylor Pickett said, “Our first quarter financial performance exceeded our expectations on higher-than-expected interest income, as well as earlier-than-anticipated cash payments received related to a turnaround asset.”
“At the same time, operating fundamentals continue to improve, with both occupancy and agency labor usage trending favorably… Additionally, the acquisition pipeline remains solid, and our balance sheet is well positioned to meet our accretive future capital allocation efforts.”
Monthly Cash Dividends of $0.67/ Share Declared
Omega Healthcare may not be at 100% with its contractual rent from its operators, but it’s still generating solid AFFO and FAD. This has allowed Omega to maintain its dividend payout at $0.67 per quarter, or $2.68 annually, since 2020. At current prices, this translates into an annual forward dividend yield of 7.25%.
While some income investors may wish Omega Healthcare stock would raise its payout, it’s important to remember that the company didn’t cut or suspend its payout during the 2020 health crisis, like many companies did.
And, with operations getting back to normal, there’s every reason to believe that management will, once again, resume raising its payout.
Omega Healthcare Stock Thumping Broader Market
Improving financial results and looming interest rate cuts have been helping energize Omega Healthcare stock. On July 24, OHI stock hit a new record intraday high of $37.13. If history is any indicator, this could be just the beginning.
Currently trading at that record high, Omega Healthcare stock is up:
- 35% over the last six months
- 26.5% year to date
- 23% year over year
OHI stock is also up 23.3% since we last looked at the company this past March.
Chart courtesy of StockCharts.com
The Lowdown on Omega Healthcare Stock
Omega Healthcare stock is a promising health-care REIT that, prior to the pandemic, was trading at record levels. It has mostly recovered from the woes of the 2020 health crisis, continuing to report improving occupancy rates, rent collections, and earnings.
Omega Healthcare’s operations are improving, state and federal support remain solid, and interest rates are set to fall. Moreover, favorable demographic headwinds bode well for Omega’s earnings, the Omega Healthcare share price, and its reliable, high-yield dividend.
