Omega Healthcare Investors, Inc. — Q1 2014 Form 10-Q Summary
Business Context and Reporting Period
Omega is a healthcare real estate investment trust focused primarily on financing and owning skilled nursing facilities and other long-term-care properties in the United States. Its portfolio consists principally of triple-net leases and fixed-rate mortgage investments. This unaudited report covers the three months ended March 31, 2014, with comparisons to the three months ended March 31, 2013.
At March 31, 2014, the portfolio included 548 healthcare facilities in 38 states operated by 49 third-party operators, with approximately 99% of real estate investments related to long-term-care facilities. The company reported 475 skilled nursing facilities, 19 assisted living facilities and 11 specialty facilities, in addition to mortgage investments.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenues | $121.0 million | $101.8 million | +18.9% |
| Income before other income and expense | $83.0 million | $64.5 million | +28.7% |
| Net income available to common stockholders | $55.8 million | $38.1 million | +46.5% |
| Diluted earnings per share | $0.45 | $0.34 | +$0.11 |
| FFO available to common stockholders | $84.4 million | $70.1 million | +20.4% |
| Operating cash flow | $78.1 million | $57.6 million | +35.5% |
| Dividends declared and paid per share | $0.49 | $0.45 | +$0.04 |
Operating expenses were $38.0 million, compared with $37.3 million in the prior-year quarter. The implied operating margin was approximately 68.6%, and net income margin was approximately 46.1%. FFO margin was approximately 69.7%. These margins are calculated from reported figures and should not be treated as GAAP measures where applicable.
Cash and cash equivalents were $20.4 million at March 31, 2014, compared with $2.6 million at December 31, 2013. Restricted cash was $28.8 million. Total assets were $3.58 billion and stockholders’ equity was $1.36 billion.
Total debt was approximately $2.09 billion, representing approximately 60.7% of total capitalization. Debt consisted of $297.0 million of secured borrowings, $200.0 million under the 2012 term loan and approximately $1.59 billion of net unsecured borrowings. The company had no balance outstanding on its $500 million revolving credit facility and reported $500 million of availability.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $19.2 million, primarily from $14.1 million of direct financing lease income related to the Ark transaction, a $2.0 million increase in mortgage interest income and $2.8 million of additional rental income from acquisitions and lease amendments.
- Net income increased by $17.7 million, benefiting from higher operating revenue and a $2.9 million net gain on asset sales. The prior-year quarter had no reported gain on asset sales.
- FFO increased by $14.3 million to $84.4 million.
- Operating cash flow increased by $20.5 million, while investing cash outflows increased by $108.9 million, primarily because of the $112.5 million mortgage investment completed in the first quarter.
- General and administrative expense increased by $1.3 million, including approximately $0.8 million of additional stock-based compensation expense. Depreciation and amortization declined by $0.5 million.
- Other expense increased by approximately $3.7 million, reflecting higher interest expense and a $2.0 million non-cash write-off of deferred financing costs associated with terminating the 2013 term loan facility.
- The company issued approximately 0.9 million shares under its equity shelf program for net proceeds of approximately $27.8 million and approximately 1.0 million shares through its dividend reinvestment plan for approximately $31.5 million.
Investments, Financing and Liquidity
- Omega originated a $112.5 million first mortgage loan secured by seven skilled nursing facilities and two assisted living facilities. The loan bears an initial annual interest rate of 9.5% and matures in January 2024.
- Omega acquired a 90-bed assisted living facility in Arizona for approximately $4.7 million.
- The company sold three skilled nursing facilities for total proceeds of approximately $3.6 million and recognized aggregate gains of approximately $2.9 million.
- On March 6, 2014, Omega issued $400 million of 4.95% senior notes due 2024, generating gross proceeds of approximately $394.3 million. Proceeds were used to repay the 2013 term loan and reduce revolving-credit borrowings.
- Management stated that liquidity, including operating cash flow and available credit capacity, was adequate for operations, debt service, dividends and planned investments over the following twelve months.
- The company reported compliance with applicable affirmative, negative and financial debt covenants at March 31, 2014.
Guidance, Outlook, Commentary and Risks
No formal earnings or investment guidance was provided in the filing. Management indicated that operator coverage ratios were currently adequate and that operators could absorb moderate reimbursement reductions, but significant reimbursement cuts could impair operators’ ability to meet lease and mortgage obligations.
- Key risks include Medicare and Medicaid reimbursement reductions, healthcare regulatory changes, occupancy levels, operator financial condition, bankruptcies and lease rejections.
- Additional risks include changes in interest rates, capital availability, credit ratings, competition, healthcare quality requirements, fraud-and-abuse enforcement, licensing and certification requirements, and the ability to maintain REIT qualification.
- Ark represented approximately 13% of total investments and 12% of operating revenue. Genesis represented approximately 11% of operating revenue. Florida, Ohio and Indiana represented approximately 16%, 10% and 9% of investments, respectively.
- At March 31, 2014, none of the company’s mortgage loans were in default or foreclosure proceedings.
- In May 2014, an Indiana MR/DD facility was effectively closed. Management expected to record an impairment reserve of approximately $1.0 million to $1.5 million and classify the facility as held for sale during the second quarter.
- The board declared a $0.50-per-share quarterly dividend on April 18, 2014, payable May 15, 2014. The dividend represented a $0.01 increase from the first-quarter dividend.
- Management stated that pending litigation, individually and in the aggregate, was not expected to have a material adverse effect on financial position or results of operations.
Most Important Facts for Investors to Verify
- Whether growth in revenue and FFO is sustained after considering the contribution from the Ark direct financing lease and other recent investments.
- The effect of increased leverage, fixed-rate debt maturities and variable-rate borrowings on interest expense and dividend coverage.
- Operator concentration, particularly exposure to Ark and Genesis, and the financial performance and coverage ratios of major tenants.
- Medicare and Medicaid reimbursement changes, regulatory developments and their effect on tenant cash flows.
- The expected $1.0 million to $1.5 million impairment associated with the Indiana facility closure and any additional held-for-sale or credit-loss provisions.
- Compliance with debt covenants and continued availability under the $500 million revolving credit facility.
- The company’s ability to maintain REIT qualification while funding dividends and future acquisitions.