OMEGA HEALTHCARE INVESTORS INC quarterly report, Q2 FY2014

Omega Healthcare Investors, Inc. — Form 10-Q Summary

Business Context and Reporting Period

Quarterly report for the three and six months ended June 30, 2014, filed August 6, 2014. Omega is a REIT focused on financing and owning healthcare real estate, primarily U.S. skilled nursing facilities, through triple-net leases, mortgages and direct financing leases.

Portfolio: 564 healthcare facilities in 38 states, operated by 49 third-party operators.
Portfolio composition: 477 skilled nursing facilities, 19 assisted living facilities, 11 specialty facilities, mortgage investments on 56 facilities, and one closed or held-for-sale facility.
Approximately 99% of real estate investments related to long-term care facilities; gross facility investment was approximately $4.3 billion.

Key Financial Metrics

Metric	Three Months Ended June 30	Six Months Ended June 30
Operating revenues	$121.8 million, up 18.8%	$242.8 million, up 18.9%
Net income available to common stockholders	$46.8 million, down 4.6%	$102.6 million, up 17.7%
Diluted EPS	$0.37 versus $0.42	$0.81 versus $0.76
Funds from operations available to common stockholders	$79.7 million versus $82.4 million	$164.1 million versus $152.5 million
Net cash provided by operating activities	Not separately provided	$166.8 million versus $121.3 million
Dividends per common share	$0.50 versus $0.46	$0.99 versus $0.91

Reported operating margin was approximately 65.5% for the quarter and 67.1% for the six-month period, compared with approximately 63.1% and 63.3%, respectively, in the prior-year periods. Net margin was approximately 38.4% for the quarter and 42.3% for the six-month period.

Balance Sheet, Debt and Liquidity

Total assets were $3.89 billion at June 30, 2014, compared with $3.46 billion at December 31, 2013.
Stockholders’ equity was $1.38 billion, compared with $1.30 billion at year-end 2013.
Total debt, including secured and unsecured borrowings, was approximately $2.36 billion, or about 63% of total capitalization, versus $2.02 billion at December 31, 2013.
Cash and cash equivalents were $28.7 million, compared with $2.6 million at year-end; restricted cash was $34.8 million.
Operating cash flow of $166.8 million exceeded the $125.5 million of dividends paid during the first six months.
Investing activities used $440.3 million, primarily due to $528.3 million of mortgage placements, partially offset by $117.5 million of mortgage principal collections.
Financing activities provided $299.6 million, including borrowings and equity issuance, after dividends and debt repayments.
The new June 2014 credit facilities provide $1.2 billion of commitments: a $1.0 billion revolving facility and a $200 million term loan, with an accordion feature allowing total commitments up to $1.75 billion. Outstanding amounts at quarter-end were $270 million and $200 million, respectively.
Management stated that the company was in compliance with its debt covenants and believed available liquidity was adequate for operations, debt service, dividends and investments over the next twelve months.

Material Changes Versus the Prior Comparable Period

Revenue growth was driven primarily by $14.1 million of quarterly and $28.2 million of six-month direct financing lease revenue from the New Ark transaction, higher mortgage interest income, and additional rental income from acquisitions and lease amendments.
Quarterly net income and diluted EPS declined despite higher revenue because of increased interest expense, a $2.6 million refinancing-cost charge, impairment expense and provisions for uncollectible receivables. The prior-year quarter included an $11.1 million gain from early debt extinguishment.
Six-month net income and FFO increased, notwithstanding higher interest expense and $4.7 million of refinancing charges.
Operating expenses increased to $42.0 million for the quarter and $80.0 million for the six-month period. The changes included a $1.6 million real estate impairment charge and approximately $2.7 million of provisions for uncollectible receivables in each comparative period.
Mortgage notes receivable increased to $652.3 million from $241.5 million, primarily reflecting the $415 million Michigan mortgage transaction and the $112.5 million first mortgage completed in the first quarter.
Debt increased following the issuance of $400 million of 4.95% senior notes due 2024 and the refinancing and replacement of the prior credit facilities.
Common shares outstanding increased to 126.7 million from 123.5 million, partly due to equity-shelf and dividend-reinvestment issuances.

Investments, Outlook and Unusual Items

On June 30, Omega entered into a $415 million Michigan mortgage secured by 31 facilities and 3,430 beds. The initial cash interest rate is 9.0%, increasing 0.225% annually.
On June 27, Omega acquired two Georgia and South Carolina SNFs for approximately $17.3 million under a 12-year master lease with an initial cash yield of 9.5%. Management expected to acquire a related third facility in the third quarter, bringing the combined purchase price to $34.6 million.
A $1.6 million impairment charge was recorded for a closed 75-bed Indiana facility. The company also recorded approximately $2.0 million for the write-off of effective-yield interest receivable associated with the Michigan mortgage refinancing and $0.8 million related to transitioned facilities.
Management declared a quarterly dividend of $0.51 per share on July 15, 2014, payable August 15, 2014.
Subsequent events included an approximately $8.2 million Texas SNF acquisition, transition of two West Virginia facilities to a new operator, and purchase of the additional South Carolina facility for approximately $17.3 million on July 31, 2014.
No specific full-year earnings or FFO guidance was provided. Management expressed confidence in liquidity and continued investment capacity.

Principal Risks and Contingencies

Tenant performance depends substantially on Medicare and Medicaid reimbursement, occupancy, operating costs, regulatory compliance and access to capital.
Potential reimbursement reductions, Medicaid budget pressures, Medicare policy changes and healthcare reform could weaken operators and their ability to pay rent or interest.
Operators may face bankruptcy, lease rejection, mortgage restructuring, regulatory sanctions, fraud-and-abuse exposure, licensing issues and litigation.
Interest-rate changes, credit-rating changes, capital-market conditions and refinancing requirements could affect debt costs and investment capacity.
Concentration risk exists by operator and geography: New Ark represented approximately 13% of investments and 12% of quarterly and six-month operating revenue; the largest state concentrations were Florida at 14%, Michigan at 11% and Ohio at 9% of investments.
Management reported no material change in previously disclosed risk factors and stated that pending legal proceedings were not expected to have a material adverse effect.

Investor Verification Checklist

Verify tenant coverage, rent collection trends and operator financial condition, particularly for New Ark, Genesis and other major operators.
Review the terms, collateral and credit quality of the $415 million Michigan mortgage and other newly originated loans.
Assess debt maturity schedules, variable-rate exposure, covenant headroom and available capacity under the new credit facilities.
Reconcile FFO to GAAP net income and evaluate the effect of impairments, refinancing charges and non-cash items.
Monitor the sustainability of the $0.51 quarterly dividend relative to operating cash flow, taxable income and investment funding needs.
Track reimbursement, regulatory and healthcare-policy developments affecting skilled nursing operators.
Confirm the accounting and collectability of straight-line rent and effective-yield receivables, including the $2.7 million of second-quarter provisions.