OMEGA HEALTHCARE INVESTORS INC quarterly report, Q2 FY2022

Omega Healthcare Investors, Inc. — 2022 Second-Quarter Form 10-Q

Reporting period: Three and six months ended June 30, 2022; filed August 2, 2022. Omega is a healthcare REIT focused primarily on skilled nursing and assisted living facilities, with investments in the U.S. and U.K. The portfolio included 943 healthcare facilities operated by 65 third-party operators, including 15 facilities held for sale.

Financial performance and position

Metric	Three months ended June 30, 2022	Prior-year period	Six months ended June 30, 2022	Prior-year period
Total revenue	$244.6 million	$257.4 million	$494.0 million	$531.2 million
Net income	$91.9 million	$86.9 million	$287.1 million	$251.2 million
Net income available to common stockholders	$89.5 million	$84.5 million	$279.1 million	$244.5 million
Basic and diluted EPS	$0.38	$0.36	$1.17	$1.04
Nareit FFO	$160.6 million	$180.8 million	$331.3 million	$351.1 million
Net cash from operating activities	Not separately provided for the quarter	Not separately provided	$305.2 million	$378.3 million

Second-quarter revenue declined approximately 5.0%; six-month revenue declined approximately 7.0%. The primary drivers were lost or reduced revenue from Agemo, Gulf Coast and Guardian-related dispositions and restructuring.
Net income increased 5.8% in the quarter and 14.3% year to date, largely because of higher gains on asset sales and lower impairment and debt-extinguishment charges. These increases do not indicate equivalent improvement in recurring operating performance.
Approximate net margin was 37.6% for the quarter and 58.1% for the six-month period. The six-month margin benefited materially from $138.8 million of net gains on asset sales.
Nareit FFO declined 11.2% in the quarter and 5.6% year to date, providing a more adverse view of recurring performance than GAAP net income.
Operating cash flow declined $73.1 million year over year. Investing activities generated $277.2 million, primarily from real estate sales and mortgage collections, while financing activities used $436.8 million.
Cash, cash equivalents and restricted cash were $168.5 million at June 30, 2022, compared with $24.4 million at December 31, 2021.
Total assets were $9.5 billion and total equity was $3.9 billion. Borrowings were $5.312 billion, net of discounts and deferred financing costs; management described total debt as approximately $5.4 billion, or 57.7% of total capitalization.
Debt had a weighted-average interest rate of 4.1%, and 98% of debt with outstanding principal balances had fixed interest payments. The revolving credit facility had $38.0 million outstanding at a 2.87% stated rate and a 2025 maturity.
Management reported compliance with applicable debt covenants. Long-term credit ratings were Baa3 from Moody’s and BBB- from S&P Global and Fitch.

Material changes versus the prior comparable period

Rental income decreased $9.5 million in the quarter and $30.4 million year to date. Agemo generated no rental income in 2022 because it continued not to make contractual payments.
Mortgage interest income decreased $4.4 million in the quarter and $7.5 million year to date, primarily because Guardian interest was accounted for on a cost-recovery basis and because of a Ciena mortgage paydown.
Omega sold 13 facilities in the quarter and 40 year to date, generating net proceeds of $54.3 million and $386.9 million, respectively, and net gains of $25.2 million and $138.8 million.
Real estate impairments were $7.7 million in the quarter and $11.2 million year to date, down from $8.8 million and $37.5 million in the prior-year periods.
General and administrative expense increased to $18.8 million in the quarter and $35.2 million year to date, driven primarily by consulting, payroll and stock-based compensation costs.
Omega repurchased 4.2 million shares in the quarter and 5.2 million shares year to date for $114.9 million and $142.3 million, respectively, under a $500 million authorization. No shares were issued under the ATM program during the first half of 2022.
The quarterly common dividend remained $0.67 per share. The board declared another $0.67 per-share dividend on July 21, 2022.

Outlook, commentary, risks and unusual items

Management stated that rental receipts, interest receipts, facility-sale proceeds, investment payoffs, revolving-credit availability and equity programs are expected to fund cash needs for the next twelve months. No quantitative earnings or FFO guidance was provided in the filing.
COVID-19 continued to pressure operators through staffing shortages, elevated labor and infection-control costs, reduced occupancy and uncertainty regarding government support. Occupancy had improved from early-pandemic levels but had not returned to pre-pandemic levels.
Agemo remained delinquent, with its rent and loan forbearance extended to August 31, 2022. Omega recorded additional credit-loss provisions of $4.7 million in the first quarter and $1.3 million in the second quarter on the Agemo working-capital loan.
Guardian resumed contractual payments in the second quarter under a restructuring. Combined annual rent and mortgage interest was reduced to $24.0 million beginning July 1, 2022; $18.0 million of previously unpaid rent and interest was deferred, with repayment generally beginning after September 30, 2024.
Other operators required rent deferrals, security-deposit applications or letters of credit. Omega placed two operators on a cash basis of revenue recognition and wrote off approximately $8.3 million and $2.1 million of straight-line rent receivables, respectively.
Allowance for credit losses totaled $144.7 million at June 30, 2022, including $63.4 million for mortgage notes and $77.7 million for other investments.
Inflation, labor costs, interest rates, government reimbursement changes and the scheduled return of the full 2% Medicare sequestration beginning July 1, 2022 could weaken operator liquidity and rent-paying capacity.
Remaining commitments totaled $371.5 million, including construction and capital commitments and other investment-loan commitments. Management also disclosed approximately $214.5 million of construction, capital and other commitments and $157.0 million of potential advances under existing other-investment loans.
Omega recorded a $3.0 million legal reserve related to a Department of Justice investigation involving Lakeway Hospital. The company also faces securities class-action and derivative litigation and disputed Gulf Coast subordinated-debt claims; outcomes remain uncertain.
Management identified no material changes in market-risk exposures or critical accounting policies and concluded that disclosure controls were effective as of June 30, 2022.

Most important facts for investors to verify

Whether operator occupancy, staffing and profitability recover sufficiently to restore contractual rent collections, particularly for Agemo, Guardian and other stressed operators.
The recurring impact of reduced rents, cash-basis accounting and asset dispositions on Nareit FFO and dividend coverage.
Credit-loss exposure, collateral values and repayment prospects for the $1.4 billion gross balance of mortgage notes and other investments, including the $144.7 million allowance.
Debt maturities beginning in 2023, refinancing costs, credit-rating sensitivity and the availability of the revolving credit facility amid higher interest rates.
The timing and proceeds of remaining asset sales and whether held-for-sale carrying values will require further impairments.
The financial and legal consequences of the Lakeway investigation, shareholder litigation and Gulf Coast subordinated-debt dispute.
Whether government reimbursement, Medicare sequestration, Medicaid funding and COVID-related support adequately offset operators’ labor, inflation and regulatory costs.