The ongoing coronavirus pandemic threatens to upend more sections of the economy than anyone can count, and one in particular. Residents of senior housing facilities are an especially vulnerable bunch in the best of times, and investors are right to be worried about potential COVID-19 catastrophes.
A panicking stock market has slashed prices of well-run real estate investment trusts (REITs) that own facilities full of senior citizens. The months ahead will be ones these businesses will be eager to forget, but the market beatings have been far too severe.
|30-Day Stock Performance
|Omega Healthcare Investors (OHI 0.22%)
|Welltower (WELL 0.19%)
As a result, shares of the above two REITs offer eye-popping dividend yields right now, and there's a pretty good chance they'll rise steadily for decades to come.
1. Welltower: Senior housing
This company is the largest owner and operator of healthcare-related real estate on the planet with around 1,300 senior living communities and 24 million square feet worth of outpatient facilities sprinkled throughout North America and the U.K. In 2019, two-thirds of Welltower's total revenue was generated by its seniors housing operating (SHOP) segment.
While most REITs act as simple landlords that collect rent, Welltower has complex financial relationships with dozens of operators that manage its SHOP facilities. In a nutshell, operators that manage profitable facilities get to keep a slice of those profits along with Welltower.
Welltower's SHOP portfolio allows the company to receive a larger slice of profits during good times but also leaves the REIT more exposed to downturns. A construction boom that has already tapered off has been pressuring the SHOP portfolio, which led Welltower to freeze its dividend payout in place since 2017.
In 2019, Welltower generated funds from operations (FFO) that came in at $3.93 per share, and in 2020, management expects FFO to fall in a range between $4.20 and $4.30 per share. If the company meets its own expectation, dividend payments will consume around 82% of FFO this year.
To soothe investor concerns, Welltower recently shared average weekly occupancy data from the four-week period ended March 13, 2020. Occupancy rates ranged between 85.6% and 85.8% among buildings across the entire SHOP portfolio, and rates in the Seattle area remained stable at 83.9% occupancy. These occupancy rates aren't terrific, but they're more than enough to allow Welltower to continue meeting its dividend obligations.
2. Omega Healthcare Investors: Triple net nursing homes
Unlike Welltower, this company relies almost entirely on steady cash flows generated by triple net leases that pass all of the variable costs associated with building ownership along to its operating partners. That means Omega Healthcare's cash flow remains stable, as long as its tenants continue paying rent.
These two REITs have a lot in common, including an insulated financial relationship with the businesses that operate their facilities. At the end of 2019, 838 out of 964 buildings in the Omega Healthcare portfolio were skilled nursing facilities (SNF).
Nursing homes that experience any cases of COVID-19 will have to temporarily ban new admissions, but the vital nature of the care they provide makes their cash flow far less susceptible to coronavirus fear than most senior living facilities.
Last October, Omega raised its dividend to an annualized $2.68 per share, and we'll probably see significant increases once the COVID-19 pandemic runs its course. In 2019, FFO reached $3.07 per share and Omega expects between $3.12 and $3.20 per share in 2020.
This, too, shall pass
The coronavirus responsible for COVID-19 transmits relatively easily, but that doesn't mean healthcare providers at SNFs can't keep it from spreading like wildfire. Keeping harmful pathogens from infecting vulnerable people has always been a top priority for the businesses that operate facilities owned by Welltower and Omega.
During the 20-year period from 1999 through 2019, Omega Healthcare shares delivered a 455% total return that beat the broad market, and Welltower shares delivered a whopping 1,200% return over the same period. Both companies experienced tough times that caused investors to jump ship during the past couple of decades. If you keep your eye on the long term, it's likely that the current pounding these companies are taking will look like an insignificant dip, too.