The week got started on a defensive note, knocking BMR stocks down 2% in line with the broad market. We aren't terribly concerned. For one thing, angst around trade negotiations is overdone. For another, our recommendations have solid fundamentals on their side.
Whenever someone tells you that this is shaping up to be Wall Street's worst week of the year, it's worth keeping the larger context in mind. Yes, stocks have stepped back. But the S&P 500 is still up 17% in the last 18 weeks. The BMR universe is up 22%, by the way.
That kind of rally has got to pause for breath sooner or later. This appears to be the place, and from the way Chinese and U.S. stocks have been moving independently (sometimes they've gone up when we've gone down or vice versa) trade looks like the latest excuse. When the mood improves, investors selling now will find an unexpectedly rich plate of 1Q19 earnings waiting for them . . . and what could easily become a full-fledged growth quarter ahead.
After all, from our point of view, winners like Omega Healthcare Investors (OHI: $35, down 2% this week) vastly outnumber disappointments. Omega gave us everything we wanted last night, with a little revenue growth and only a little deterioration on the bottom line. Revenue of $223 million beat our target by $3 million, giving investors evidence that the business is still moving forward despite all the headwinds Real Estate faced last year.
But the big news is that the company is still running efficiently enough to generate $0.34 per share in profit and $0.76 per share in Funds From Operations, the pool of cash REITs use to make their quarterly distributions. We would have been happy with an FFO number as low as $0.72, and in any event there's plenty of money here to make the $0.67 dividend.
Omega faced tough year-over-year comparisons and mostly met them. Dumping 15 Nursing Homes left behind by battered tenant Orianna Health Systems liberates $176 million in capital. Buying broad-based Healthcare REIT MedEquities Realty Trust puts that money back to work and diversifies the property portfolio. And with a high-end Senior Housing development opening in Manhattan late this year, management is confident that the fundamentals are ready to start improving again.
FFO guidance for the year indicates that Omega can make 3% more this year than it did in 2018. That's what a turnaround looks like. We're happy with these numbers and are looking forward to the road ahead.
Speaking of the road ahead, we'll be checking in on Annaly Capital Management (NLY: $9.65: flat) more often until we're sure that all BMR subscribers have all the information and illustrations you need to guide your investment decisions.
Cutting a stock loose when the narrative changes is always a complicated decision. If you were here in 2016, you've beaten the S&P 500 by 5 percentage points a year and stand to earn a 10% yield for the foreseeable future. The stock would need to drop another 17% in the next 12 months before its total return recedes to the point where you've underperformed the market as a whole. In that scenario, odds are good the market will be dropping as well.
But say you bought Annaly at the peak two years ago. You came in at $12.73 and have received $2.50 in dividends. At $0.25 per quarter, you'll be whole again by the end of the year, provided of course that the stock doesn't drop much farther in the meantime. From there, you'll start earning money on the position.
We can't say how much downside Annaly can dish out before it regains its balance, but history is a good guide. The last time management had to cut the dividend (six years ago), the yield peaked at 11.9%. A repeat scenario suggests a bottom around $8.40, which isn't fun but it only takes another year for the dividend to fill the hole from there. Either way, there's no way to tell whether you'd do better in other stocks. What we know is that management is confident that they can pay $1 a year and that's more than we can count on the S&P 500 to provide.
If we were just hearing about the stock for the first time, we'd recommend it. That's the key lesson our team has learned from hedge fund land: When a stock you like drops, you need a great reason to turn against it at that lower price. Locking in a 10.4% yield for years to come is a strong move at this point in time.