Omega: A Healthy REIT

08/10/2016 8:00 am EST


Briton Ryle

Editor, The Wealth Advisory

It’s generally assumed that REITs are very interest rate-sensitive. But studies show that REITs perform better than regular stocks when interest rates are rising, explains Briton Ryle, The Wealth Advisory.

I will not be selling out of REITs at the first sign of interest rate trouble. We have nice gains with these stocks, and they consistently raise their dividends.

Plus, we know that the Fed is not going on a prolonged rate hike campaign. Three small hikes are not going to impact REITs very much.

So, in a general sense, I don’t expect a lot of downside for REITs. I’m actually expecting much upside, even with the rate increases.

Omega Healthcare Investors (OHI) remains my favorite health care REIT and one of my favorite REITs in general.

Of its revenues, 89% are contracted through 2020. OHI is growing faster — and growing its dividend faster — than any other healthcare REIT.

Not only does Omega have a habit of increasing its dividend quarterly, but management has also hiked the payout by over 141% over the past decade.

Even though management missed revenue estimates last quarter, I consider that more of an error on the part of analysts. They guessed wrong (which they usually do), and investors paid the price with a dip in share price.

We’ve also seen a dip in price due to the hawkish stance taken by the FOMC at the most recent meeting of the “most powerful people in the world.”

But OHI is a solid company, and the US need for skilled nursing is just going to increase as the boomers continue to age (sorry, mom and dad). So we shouldn’t have to deal with deflated prices for long.

With a large, stable dividend, strong potential for 20% annual returns, and an attractive forward P/E under 10, I continue to rate Omega a “strong buy” under $40. I’m maintaining my 12-month price target at $47.

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