Why Omega Healthcare Investors Stock Tumbled 18% in 2021

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What happened

Shares of Omega Healthcare Investors (NYSE:OHI) plunged 18.5% in 2021, according to data provided by S&P Global Market Intelligence. That significantly underperformed the S&P 500, which gained nearly 27% last year. Weighing on the real estate investment trust (REIT) were the continued headwinds facing the senior housing sector from the ongoing pandemic. 

So what

The pandemic hit the senior housing sector hard. That impacted facility occupancy levels, which Omega noted remained “meaningfully below pre-pandemic levels” as of the third quarter. Because of that, many operators were struggling to generate enough revenue to meet their financial obligations like paying rent. While federal and state governments were providing some support, Omega warned in the third quarter that this might not be enough to fund its obligations as the pandemic continues. 

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These issues forced the healthcare real estate investment trust (REIT) to apply security deposits, letters of credit, and collateral to cover rent. While that benefited its financial results in the near term, the REIT warned that when those sources ran out, its funds from operations (FFO) would take a hit until tenants could pay rent. 

The industry’s issues also led the REIT to reposition its portfolio in 2021. It sold 45 properties for more than $240 million through the third quarter. These sales helped reduce its exposure to financially troubled tenants and provided it with cash to make new real estate investments. It made $605 million of acquisitions through the third quarter. On top of that, the REIT invested in several mortgage loans, renovation projects, and new construction. These investments should help grow its income in the future as market conditions improve. 

The REIT also completed several financing transactions last year. It took advantage of low interest rates to extend its debt maturities while lowering its interest expenses. It also secured new credit and term loans facilities to increase its liquidity. These moves enabled the REIT to grow its portfolio while maintaining its dividend, which currently yields 8.5%. 

Now what

Several Omega Healthcare Investors tenants stopped paying rent last year as the ongoing pandemic impacted their financial operations. The company was able to cover that by applying security deposits and other collateral in the near term. However, it will eventually exhaust those funding sources if its tenants don’t start paying rent. That uncertainty weighed on the healthcare REIT last year and will continue doing so until its tenants are in a firmer financial position. It also puts its high-yield dividend at higher risk for a reduction.  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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