Higher interest rates are generally not good for real estate investment trusts (REITS), as they have to pay more for financing, which can cut into their profit margins. However, Omega Healthcare Investors (OHI 1.47%) and Sabra Health Care REIT (SBRA 1.71%), two REITs with exposure to skilled nursing and assisted-care facilities, are beating the market this year, with the S&P 500 down more than 18%.

On top of that, each offers a dividend with a yield of 8% or more. While skilled nursing facilities took a big hit during the pandemic, because of reduced occupancy rates and higher labor cost amid staffing shortages, the long-term outlook for such facilities, and the REITS that specialize in them, is strong because the global population is aging. According to the U.S. Census Bureau, since 1950, the number of people over age 65 has grown from 8% of the population to 16.9% today. While many of those turning 65 or older may want to age in place, that's not always possible. By 2030, all baby boomers will be 65 or older and many of them will need to be in assisted living centers or other senior housing.

Omega Healthcare emerges healthy

Omega Healthcare's shares are up almost 7% this year. The company specializes in skilled nursing facilities, with 921 facilities rented to 63 tenants in 42 states and the U.K., as of June 30. The COVID-19 pandemic was especially hard on Omega's tenants, but as its net income returns to form, Omega Healthcare's business is looking healthier.

In the second quarter, the company reported net income of $92 million or earnings per share of $0.38 (EPS), up from $87 million or $0.36 in the same quarter last year. The company's adjusted funds from operations (AFFO) was down, though, at $185 million, or $0.76 in AFFO per share, compared to $207 million or $0.85 in AFFO per share in the second quarter of 2021. The company said the reduction was due to lowered revenue, thanks to asset sales, rent restructuring, and the timing of general and administrative expenses. AFFO was still up compared to the first quarter, when the company reported AFFO of $183.5 million, or $0.74 per share.

Even with some AFFO reduction compared to last year, the company's AFFO payout ratio is safe at 88%. The company also helped its stock price by spending $115 million on share repurchases in the quarter. Omega Healthcare has kept its dividend at $0.67 for 13 consecutive quarters. Even with the stock's rise this year, the yield is relatively high at about 8.3%.

The key for Omega is it has sold 40 less-profitable facilities this year for $387 million. While that reduced AFFO, the company's margins have improved, putting it in a stronger position to find new growth elsewhere.

Sabra is branching out

Sabra Healthcare owns 441 properties, leased to 75 tenants, including skilled nursing facilities, senior housing, and behavioral health facilities. The company's shares are little changed so far this year.

In the second quarter, the company reported revenue of $155.9 million, up 1.9% year over year. Net income was $16.8 million compared with a net loss of $132 million in the same period last year and EPS was $0.07 compared to a loss of $0.61 in the second quarter of 2021. The company's AFFO was down, though, at $0.36, compared to $0.39 in the second quarter of 2021.

Sabra cut its dividend from $0.45 to $0.30 a share in early 2020 when the pandemic began to take its toll on skilled nursing facilities. It has kept the dividend the same since then and its current yield is about 8.7%. The company's AFFO payout ratio of 83% is slightly better than Omega's and certainly safe.

Perhaps learning a lesson from the pandemic, Sabra has diversified a bit by spending $800 million on behavioral health facilities. On the second-quarter earnings conference call, Talya Nevo-Hacohen vice president, treasurer, and chief investment said, "We are committed to supporting the delivery of behavioral health services by creating and financing the places where they happen so that these critical services are accessible to all regardless of age, income or location."

SBRA Funds from Operations (TTM) Chart

SBRA Funds from Operations (TTM) data by YCharts

Taking the dividend and running with it

Both of these healthcare REITs, despite short-term blips, are in position to benefit from long-term growth and have shown the ability to increase funds from operations. In the meantime, they offer high-yield dividends with relatively little risk. They are focusing on the bottom line, increasing margins instead of just growing revenue.

Of the two, I feel Omega Healthcare's dividend is safer, even with the higher payout ratio. The company showed its commitment by sticking with the same dividend even when things looked bleak early in the pandemic, so it is less likely to have a dividend cut now that business is picking up.