Charts of the Day: Omega Healthcare Investors

Omega Healthcare Investors (OHI) released its quarterly earnings yesterday after the close, and Wall Street was noticeably underwhelmed. The shares slid nearly 4% in afterhours trading.

I won’t be doing a detailed analysis of Omega’s tenant issues today or of the broader skilled nursing REIT sector, which has been under pressure for three years now. This is instead a “quick and dirty” look at some of Omega’s price and valuation trends.


Past performance is no guarantee of future results.

Even before yesterday’s after-hours action, OHI was trading near five-year lows… at a time when the broader stock market is just a few percent away from all-time highs.

Not all of this underperformance is specific to OHI, of course. The REIT sector as a whole has struggled to get any momentum over the past two years… still sits below its old 2007 highs. yet the carnage in Omega’s share price has been epic. OHI is down nearly 40% since its early 2015 highs.


Past performance is no guarantee of future results.

Today, as a result of that slide, OHI’s dividend yield is now approaching the crisis levels of the 2008 meltdown…


Past performance is no guarantee of future results.

…yet OHI’s dividend payout continues to rise. Omega has grown its dividend every year since 2003 and at a compound annual growth rate of nearly 10% over the past 10 years.

Omega reported quarterly funds from operations of $0.77, which covers the quarterly dividend of $0.66 by a sufficient margin. So, unless we see significant and sustained deterioration to FFO, we can assume the dividend is safe, at least for now. Though given the issues facing some of Omega’s tenants, it’s something that needs to be watched closely.

Again, this is not a comprehensive report on Omega Healthcare Investors but more of a “quick and dirty” gut check. For now, I’m maintaining my view that OHI should continue to be bought on dips.


Disclosure: Long OHI

Charts of the Day: Realty Income (O)

Realty Income (O) is one of my favorite long-term dividend payers. I own a decent chunk of shares in an IRA that I have pledged never to sell. The reinvested dividends are compounding, and I intend to live on them in retirement someday.

But other than the reinvested dividends, I haven’t been buying new shares in recent years because they price just wasn’t compelling enough. After the beating the shares have taken of late (the entire REIT sector has been battered due to rising long-term bond yields), I figure it’s time to reevaluate.

Past performance no guarantee of future results.

The shares are down by about a third from their August 2016 highs and are now sitting at prices first seen in 2013.

Past performance no guarantee of future results.

Due to the share price declines (and to a lesser extent to increases in the dividend payout), the dividend yield is now over 5% again after spending most of the past decade below 5%.

Of course, the dividend yield by itself doesn’t mean much unless you compare it to something. Realty Income’s 5.4% dividend yield is about 2.5% higher than the 10-year Treasury yield. That’s within the normal range of the past decade, albeit on the higher end of that range.

Past performance no guarantee of future results.

Meanwhile, Realty Income continues to raise its dividend like clockwork: 81 consecutive quarterly increases. Over the past 10 years, it’s raised its dividend at about 5% per year, well above the rate of inflation.

Realty Income might not be the steal it was back in 2008. But at today’s prices, it’s worthy of new money. You’re not going to get rich quick in it, but it beats the death by 1,000 inflation cuts that you’re likely to get in a traditional bond portfolio.

Disclosures: Long O

15 REITS for Retirement Income

The following first appeared on as The 15 Best REITs for Retirement Income

Few asset classes are better suited to retirement portfolios than real estate. If managed sensibly, a portfolio of real estate investment trusts (REITs) can provide a steady stream of retirement income that will last a lifetime.

To start, REITs are incentivized by the tax code to pay outsize dividends. REITs pay no corporate tax at the federal level so long as they distribute at least 90% of their taxable income to their investors as dividends. The U.S. corporate tax rate is a punishing 35%, so we’re talking about a lot of extra cash.

But a good retirement income portfolio needs more than just a high dividend yield. You also want rock-solid stability. If you intend to live on cash from your investments, you can’t afford to suffer a dividend cut or a major business setback. So your best REITs for retirement will tend to be moderate yielders in stable, non-cyclical subsectors. Experience also counts for a lot here – you typically want to trust REITs that have survived a recession or two with their dividends intact.

Today, we’re going to look at 15 of the very best REITs to generate long-term retirement income. You’ll notice certain areas are missing, such as malls and office buildings; these are too sensitive to economic swings, and their biggest players slashed dividends during the 2007-09 meltdown and aftermath. Instead, you’ll find 15 reliable companies that should continue paying their dividends like clockwork, come what may in the economy.

Public Storage (PSA)

Few corners of the market are as durable as self-storage REITs.

“Self-storage requires modest capital outlay to operate, property taxes are skinny and the demand is inelastic,” says Ari Rastegar, founder of Dallas-based Rastegar Equity Partners, a private equity firm specializing in commercial real estate. “The recession resiliency of the asset class was showcased in 2008 by returning 5% cumulative with dividends. Another way to look at it is investors generate the rent of a class B multi-family apartment from what is essentially a shed.”

Public Storage (PSA) is America’s largest self-storage landlord, and over its life, it has been a dividend-raising machine. The REIT has improved its annual dividend for eight consecutive years, and it was able to keep its payout stable throughout the 2008 meltdown. At current prices, PSA yields nearly 4%, which isn’t exceptionally high. But the stock has raised its dividend at nearly 16% per year over the past decade, which isn’t too shabby.

Public Storage has been down of late because of oversupply concerns, and shares have dropped nearly 25% from their early 2016 highs. However, this setback could be viewed as a buying opportunity in one of the very best REITs on the market.

To continue reading, please see The 15 Best REITs for Retirement Income


Searching for Value in the REIT Rubble

Leave it to the stock market to do the exact opposite of what you expect it to do. Following Donald Trump’s surprise win, stocks have spent the past three weeks pushing higher.

Ironically, given that the President-Elect is a world-renown real estate developer, real estate investment trusts (REITS) have gotten clobbered. REITs as a sector peaked in July, but the selling has continued well past the presidential election.

As I’m writing this, the sector is down nearly 20%… ouch!

Whenever I see a sector flirting with bear-market territory at a time when the rest of the market is hitting new all-time highs, I sit up and take notice. Sometimes it can be the sign of a sector facing deep, long-term problems with no easy solutions. But just as often, it’s a classic market overreaction.

So, as we look at the carnage in REITland, which is it?

Is the market correctly forecasting real estate doom… or is Mr. Market working himself into a stomach ulcer over nothing?

Let’s take a look.

The narrative right now is that the Fed’s pending rate hike is bad news for REITs, as it potentially raises their cost of capital. Adding to this anxiety is the spike in longer-term bond yields. See, higher bond yields hurt REITs in two ways.

To start, it raises their borrowing costs. REITs, as with most real estate investors, tend to borrow a lot of money, and every additional dollar paid in interest is a dollar not kept as profit. But perhaps worse, REITs tend to be priced relative to bonds. So rising bond yields (and falling bond prices) mean rising REIT yields (and falling REIT prices).

This latter point has been a particular worry since investors have come to view REITs as bond substitutes over the past few years. With bond yields too low to be worth considering, investors have been chasing the higher yields of other income sectors, particularly REITs.

Again, that’s the narrative. But is it actually true?

Well, let’s see. The following chart shows the performance of REIT stocks during periods of rising bond yields. The shaded areas represent periods in which 10-year bond yields were rising.

If the narrative you read in the financial press were true, you’d expect REIT stocks to tank every time bond yields had a significant bounce. But that is clearly not the case here. Of the six times since 1981 that we saw bond yields rise by a meaningful amount, REIT prices actually rose in three of them.

With President-Elect Trump pushing for large tax cuts and major new infrastructure spending, there’s a lot of worry in the market right now that outsized budget deficits will cause long-dead inflation to come back with a vengeance.

Don’t bet on it.

Let’s get serious. If large budget deficits were all it took to stoke inflation, then Japan – with the largest budget deficits in the world – would also have the highest inflation in the world. Suffice it to say, it doesn’t. Japan has been fighting deflation, not inflation, for three decades now.

And while I would love to get a tax cut, I don’t see it giving a major jolt to consumer spending. The cohorts most likely to have incomes high enough to benefit – baby boomers and early gen-xers – have already crossed their peak spending years, so any extra cash due to tax cuts is likely to get saved or invested rather than spent.

The generation most likely to actually spend the money – millennials – is already paying close to zero in taxes at its current income levels, so it’s hard to see Trump’s tax plan having a major impact.

So, what’s next for REITs?

I’m betting that we see another repeat of the scenario we had a year ago. Then, as now, bond yields ended the year relatively high, and REITs were under pressure. But when yields started to ease, REITs enjoyed a spectacular rally.


Rising Bond Yields Smash REITs. What Happens Next?

Photo credit: clement127

Real estate investment trusts have gotten absolutely crushed over the past three months and particularly since Donald Trump’s surprise victory in the 2016 presidential election. The perception is that Trump’s economic policy will blow out the budget deficit, fuel inflation and send bond yields higher. And as REITs have become proxies for bonds in the low-yield world of recent years, as go bonds, so go REITs.

That’s the consensus view, at any rate. I have my doubts. To start, surging budget deficits do not automatically lead to higher bond yields. If that were true, Japan would have the highest bond yields in the world. Instead, Japanese yields are essentially frozen at 0% and have been for years. Furthermore, the biggest peacetime deficits in history happened during the 2008-2009 meltdown… when bond yields plunged to lows no one dreamed possible before. And all of this depends on Trump getting his budget through a Tea-Party-controlled House of Representatives that ties its entire indentity to reducing the size of the government.

Nevertheless, REITs are taking it on the chin at the moment. This is the third time in four years that this has happened. The first and second, respectively, were after the 2013 Taper Tantrum and as Janet Yellen first raised the Fed Funds rate above zero this time last year. In both previous cases, REITs dropped about 20% in value before recovering to new highs. This time around, REITs are down by a comparable amount… might a repeat rally be in the cards?

I think it’s highly likely. I’ve argued for years that, even at their current low yields, REITs remain attractively priced relative to bonds and most other income investments. And Evercore ISI, writing for Barron’s, was kind enough to work out the numbers for us. Evercore ISI examines REIT prices relative to:

  1. price/net asset value (NAV)
  2. price/adjusted funds from operations (AFFO)
  3. implied cap rates versus 10-year Treasury yields and corporate bond yields
  4. a sensitivity analysis looking at upside/downside scenarios based on implied cap rates and spreads to the 10-year Treasury looking out one year from now.

These were their findings:

Price/NAV: Given the steady decline in REIT prices since early August, REITs are now trading at an 11% discount to our current NAV estimates and a 12% discount to our forward NAVs. This 11% discount is the widest we’ve seen since January 2014 (that’s nearly three years).

Price/AFFO: The sector is trading at 20.2 times AFFO on a forward-12 month basis which is two turns below the sector’s trailing three-year average but slightly less than four turns above the sector’s long-term average which is just shy of 16.5 times. However, when we adjust the AFFO multiple for the lower interest rate environment, a 20 times multiple doesn’t look out of place and in fact using historical spreads (AFFO yields minus 10-year Treasury yield) an AFFO multiple of 20 times would imply a 10-year Treasury yield of 2.65% which is 60 basis points above Wednesday’s closing yield.

Implied cap rates versus 10-year Treasury: The spread Wednesday versus 10-year Treasury yield is 370 basis points and is 53 basis points higher than the long-term average suggesting that REITs are modestly undervalued versus Treasuries or are fairly valued assuming the 10-year Treasury yield reaches 2.5% in the near to intermediate-term.

Implied cap rates versus BAA bond yields: The spread Wednesday is 127 basis point and is wider than the long-term average of 42 basis points and roughly double the spread experienced over the past 24 months. What’s interesting to note is that while the 10-year Treasury yield has backed up 55 basis points since June, the BBA bond yield is only up 10 basis points over the past four months implying that credit spreads have narrowed while the base rate has expanded.

While it’s helpful for investors to look at a snapshot of valuation metrics, we also wanted to provide a more dynamic implied cap analysis which allows two variables to move at the same time. In this exercise, we let Treasury yields and future net operating income (NOI) growth fluctuate within a range while keeping the “spread” constant at 311 basis points which is equal to the long-term average. If an investor assumes that the 10-year Treasury yield will approach say 2.75% in 12 months and the REIT sector could generate NOI growth of say 3% one year from now, then REITs should rise about 5% over the next year.

So in a nutshell, REITs are pretty reasonably priced right now. If you’re bearish, you’re essentially betting that the 10-year Treasury yield is going north of 3% within the next year or that earnings ar about to fall off a cliff. While I suppose either of those outcomes could happen, I wouldn’t bet on it. I would expect REITs to enjoy another solid rally… just as they did the last two times they sold off on yield fears.