"Under the Radar" is a daily feature that uncovers little-known companies worthy of investors' consideration. Check in at 5 every morning to find out about stocks that tend to beat their bigger brethren.
) -- Investors' aversion to housing clobbered real estate investment trusts in 2008. The Dow Jones REIT Index has fallen 39% over the past year, but is up 82% from its March low. REITs trade like stocks but are ideal for income-oriented investors because of their hefty cash payouts. Here are a few to consider.
Hunt Valley, Maryland-based
Omega Healthcare Investors
owns income-producing health-care, assisted living and rehabilitation facilities in the U.S. As baby boomers age and health-care costs rise, Omega will enjoy steady profit growth.
Second-quarter net income grew 16% to $20 million and earnings per share jumped 5% to 21 cents, restrained by a higher share count, as revenue increased 12% to $49 million. The operating margin inched down to 60% and the net margin rose from 39% to 40%.
The company holds less than $12 million of cash reserves, compared to $530 million of debt and $9.2 million of quarterly interest expenses. But weak liquidity is common for REITs. And Omega's debt-to-equity ratio of 0.7 is less than the industry average, a sign of fiscal prudence.
Omega has advanced 10% in 2009, outpacing the
Dow Jones Industrial Average
, but underperforming the
S&P 500 Index
. The stock trades at a price-to-earnings ratio of 18, indicating parity with the overall market, but a sizable discount to peers.
Omega's obvious selling point is its 6.8% dividend yield. REITs are structured differently than corporations and, consequently, their earnings distributions are large, but subject to different taxation laws. Nevertheless, the yield is attractive and sustainable. Omega has an impressive record of dividend increases.
We give Omega a financial-strength score of 5.6 out of 10, higher than our REIT average of 3.3. Another financially stable trust with a health-care focus is
National Health Investors
, which we rate "buy" and award a lofty financial-strength score of 9.5 out of 10.
Other "buys" to consider are
Nationwide Health Properties
Senior Housing Properties Trust
Universal Health Realty Income Trust
, which all offer yields over 5%.
Some analysts have become bearish on REITs due to fears about commercial real estate vacancies and defaults. Although concern is justified, the aforementioned stocks offer exposure to the more secure and growth-poised health-care sector.
-- Reported by Jake Lynch in Boston.