Sector Watch: Healthcare REITS

Investors seeking a safe haven from stock market turmoil may want to look to  healthcare REITs National Health Investors, Inc. (NYSE:NHI) and Omega Healthcare Investors, Inc. (NYSE:OHI) for steady growth, generous dividends and reasonable valuations. 

Healthcare REITs (or real-estate investment trusts) own long-term care facilities, medical office buildings and related medical assets. This group is positioned for steady growth as aging baby boomers reach retirement age and demand more healthcare-related services. Healthcare REITs are generally immune to the effects of economic downturns; their occupancies and rents that are more stable than other REIT types. REITs offer attractive dividends since they must pay out the majority of their earnings to shareholders to retain their REIT status. REITs also help diversify investment portfolios; according to industry trade association NAREIT, the correlation rate between REITs and the S&P 500 averages only 37%.
 
Omega Healthcare Investors, Inc. owns or holds mortgages on 241 skilled-nursing facilities, seven assisted-living facilities and four rehabilitation hospitals. Omega’s properties are spread across 29 states and many tenants. The company has invested over $1.9 billion in these facilities. Omega’s largest tenant, CommuniCare Health Services, represents 22% of the portfolio. 

During the six months ended June 30, 2008, Omega produced net income of $34.4 million, or $0.41 per share, on operating revenues of $84.6 million. This compares with net income totaling $36.7 million, or $0.50 per share, on operating revenues of $80.7 million one year earlier. Net income fell because of an uncollectible accounts receivable and impairment charges this year.

After the quarter ended, the company sold two hospitals for $29 million and was awarded $6 million for a tenants’ breach of lease. In September, Omega closed a $97 million financing and used part of the proceeds to purchase and leaseback three skilled-nursing facilities and a continuing-care retirement community in Pennsylvania.

Omega’s financial results have exceeded analyst estimates in each of the last four quarters and consensus estimates look for this company to produce 8% annual long-term growth. Omega trades in line with other healthcare REITs at 22 times earnings and offers a high 6.3% dividend yield. I have a $22 price target for Omega, which closed at $16.48 on Tuesday.

National Health Investors, Inc. owns 124 healthcare facilities across 17 states and has invested assets worth $375 million. Its portfolio includes 83 long-term care facilities, one acute care hospital, four medical office buildings, 15 assisted-living facilities, four retirement centers and 17 residential projects for the developmentally disabled.

In recent years, NHI has focused on reducing debt and improving the diversification of its customer base. Noteworthy progress has been made in both areas. At June 30, 2008 the company’s debt-to-capitalization ratio was only 1.75%, the lowest in its history. In addition, the percentage of NHI’s portfolio leased to its largest tenant, National Healthcare Corp., has been reduced to a current 20% from 100% several years ago.

NHI generated net income totaling $28.2 million, or $1.01 per share, on operating revenues of $316 million during the first six months of 2008. This was slightly below comparable prior-year results when net income was $30.5 million, or $1.10 per share, on revenues of $317 million. However, prior year earnings benefited from a $0.10 per share one-time gain relating to the recovery of previous written off loans.

Analysts target 8% annual growth for NIH over the next five years.  These shares are affordably priced at 10 times earnings and provide a 6.5% dividend yield. I have a $38 price target for NHI, which closed at $30.84 on Tuesday.

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