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Why Omega Healthcare Investors Stock Fell 33% in March

By Reuben Gregg Brewer - Apr 8, 2020 at 10:43AM

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Nursing-home owner Omega Healthcare's rent roll is strong, but it isn't immune from the COVID-19 impact.

What happened

Shares of nursing-home focused real estate investment trust (REIT) Omega Healthcare Investors (OHI -0.27%) lost a third of their value in March according to data from S&P Global Market Intelligence. That's a dramatic decline compared to the S&P 500 Index, which was down 13%, and the broader REIT sector, which was down around 20%, using the Vanguard Real Estate ETF as a proxy. 

So what

The big-picture reason for the decline was COVID-19, which started to spread more widely in the United States in February and picked up even more steam in March. The disease is highly contagious and appears to be particularly dangerous for older adults and those with preexisting health conditions. That, of course, is exactly the combination that results in people moving into nursing homes, which is Omega's primary property type.

A young woman in a medical coat comforting an older woman sitting down

Image source: Getty Images.

Investors reacted by selling off the shares in fear of the worst. That's not an unreasonable decision. Omega, however, has a mix of positive attributes and negative ones in this situation. On the positive side, nursing homes are largely need-based facilities, so the fundamental need for nursing-home care isn't likely to experience a long-term impact from COVID-19. Furthermore, a nursing home's costs are often covered by Medicare and Medicaid, so the payee is usually the government. Thus, it's highly likely that Omega's lessees will continue to get paid and, as such, that Omega's rents will continue to be paid. 

That's the good news. However, there is bad news here, as well. First, residents at Omega facilities are at an elevated risk from COVID-19. That means that occupancy could fall if the virus spreads in the REIT's nursing homes. Second, costs are rising as Omega's tenants work to ensure resident safety. That puts pressure on their ability to pay rent. And third, the potential residents that are most likely to need nursing home care in the near future are also highly at risk from COVID-19. So the flow of new residents could be disrupted and lower than normal for a time. Although Omega's nursing home focus is insulated from some issues surrounding COVID-19, it is still exposed to the impact of the virus.

Now what

Omega has handled previous headwinds in the nursing-home sector in relative stride. It is likely to survive the impact of COVID-19, as well. However, it is not a low-risk REIT and never has been (historically, reliance on Medicare and Medicaid has been seen as a negative because the payment rates are set by the government). For more aggressive investors, the price drop here might be worth a look, but for moderate to conservative dividend investors, Omega probably isn't the best REIT option around.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Vanguard REIT ETF. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Omega Healthcare Investors, Inc. Stock Quote
Omega Healthcare Investors, Inc.
OHI
$33.28 (-0.27%) $0.09

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