The coronavirus pandemic has been particularly difficult for nursing homes. That's the big story behind Omega Healthcare Investors' (OHI -0.72%) recent troubles, given that it is one of the largest publicly traded nursing home-owning real estate investment trusts (REITs) you can buy. The thing is, while business has been improving, there's still a long way to go.
A closer look at the problem
Very few people, if any, go into a nursing home because they want to. These facilities provide a high level of care to people who need more help than can be easily or affordably provided in a different setting. Nursing homes are a textbook case of a necessity service. That, in many ways, provides a strong underpinning to the business.
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That said, nursing home residents are among the sickest and most vulnerable older adults. So when the coronavirus pandemic started to spread, it wasn't too surprising that nursing homes saw a dramatic increase in move-outs. That's a euphemistic term that includes people who leave of their own accord and patient deaths. The truth is that move-outs also tend to increase during flu season, so a new respiratory illness that was highly deadly pretty much impacted nursing homes exactly as you would expect.
Omega's occupancy levels fell from 83% or so at the end of 2019 to the 74% range at the end of 2021. That's not a sustainable level, and management has been very clear that it needs to see occupancy recover into the 80% range before its business is really back on solid ground.
A long way to go
To be fair, the REIT believes its balance sheet is in strong shape, so it has continued to support the dividend payment. Essentially, there's no reason to cut the payment in the short term if the business is likely to recover over the long term. But how long is the recovery likely to take? That's a tricky question, and it depends on the future path of the coronavirus.
That said, during Omega's fourth-quarter 2021 earnings call, management provided an outlook on the occupancy front. It wasn't bad, but it also wasn't good. Essentially, the landlord has been seeing monthly occupancy increases of around 40 to 50 basis points (about a half of percentage point or so). If that trend continues, occupancy would crawl slowly back toward 80% over the next year and, hopefully, pass that key milestone in 2023.
So 2022 is, at best, going to be another year of recovery. That will probably be a bit unsettling to more conservative investors. But there is a light at the end of the tunnel, assuming there's no new variant that changes the recovery path. Now add in the fact that Omega offers a huge 8.6% dividend yield. Even if you cut that in half, assuming the coronavirus situation doesn't improve as expected, and it is multiples more than the S&P 500 Index's 1.3% yield.
Risky, but perhaps worth it
This is not a stock for conservative investors by any stretch of the imagination. Indeed, management recently announced that yet another tenant is having trouble paying its rent. And yet the risk of a dividend cut doesn't seem imminent, given management's commentary and the fact that fourth-quarter 2021 adjusted funds from operations (FFO) was $0.77 and its current dividend payout sits at $0.67. That's an adjusted FFO payout ratio of 87%, which is high but not unreasonable given the industry backdrop. For aggressive types looking for a high-yielding stock backed by a necessity business, Omega could be worth a close look. You just have to go in knowing that the business won't be back to "normal" until at least 2023.
