Why Omega Healthcare stocks fell 33% in March – Motley Fool

What happened

Nursing Home Investment Fund Shares (REIT) Omega Healthcare Investors (NYSE: OHI) lost a third of their value in March, according to S&P Global Market Intelligence data. This is a drastic drop compared to S&P 500 index, which fell 13%, and the broader REIT sector, which fell approximately 20%, using the Vanguard Real Estate ETF as a proxy.

So

The general reason for the decline was COVID-19, which started to spread more widely in the United States in February and collected even more steam in March. The disease is highly contagious and appears to be particularly dangerous for older adults and those with pre-existing health conditions. This, of course, is exactly the combination that translates into people moving to nursing homes, which is Omega’s main property type.

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Investors reacted by selling the shares for fear of the worst. It is not an unreasonable decision. Omega, however, has a mix of positive and negative attributes in this situation. On the positive side, nursing homes are largely needs-based facilities, so the basic need for nursing home care is not likely to have a long-term impact from COVID-19. In addition, the costs of a nursing home are often covered by Medicare and Medicaid, so the recipient is usually the government. Therefore, it is very likely that Omega tenants will continue to be paid and, as such, Omega rents will continue to be paid.

This is the good news. However, there is also bad news here. First, residents of Omega facilities have a high COVID-19 risk. This means that employment could decline if the virus spreads to REIT nursing homes. Secondly, costs rise as Omega tenants work to ensure the safety of the residents. This puts pressure on their ability to pay rent. Third, potential residents who are more likely to need home care in the near future are also highly at risk from COVID-19. So the flow of new residents may be interrupted and less than normal for a certain period. Although Omega’s nursing home focus is isolated from some of the problems surrounding COVID-19, it is still exposed to the impact of the virus.

And now?

Omega handled the previous twenty odds in the nursing home industry relatively. The impact of COVID-19 is also likely to survive. However, it is not a low-risk REIT and never has been (historically, relying on Medicare and Medicaid has been viewed as negative because payment rates are set by the government). For more aggressive investors, the drop in prices here might be worth a look, but for investors with moderate to conservative dividends, Omega is probably not the best REIT option out there.