OHI

Business Context and Reporting Period

Company: Omega Healthcare Investors, Inc. (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2010
Business Overview: The Company invests in healthcare-related real estate, primarily skilled nursing facilities (SNFs), under triple-net leases and mortgage agreements. As of March 31, 2010, the portfolio consisted of 295 facilities in 32 states. The Company also operates two facilities directly via an interim operator (TC Healthcare) pending transition to a new tenant.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased by $9.5 million (19.3%) year-over-year. This was driven primarily by a $6.0 million increase in rental income from the acquisition of 40 facilities from CapitalSource in December 2009 and the conversion of four mortgage facilities to leased properties. Additionally, miscellaneous income rose $3.7 million due to a legal settlement with a prior operator.
• Net Income Decline: Net income decreased by $3.9 million (15.9%). This decline was primarily due to a $4.8 million increase in interest expense resulting from higher borrowings associated with the CapitalSource acquisition and the absence of a $4.5 million litigation settlement gain recorded in Q1 2009.
• Liquidity Improvement: Cash and cash equivalents surged from $2.2 million to $75.2 million, driven by net proceeds of $196.6 million from the issuance of $200 million in 7.5% Senior Notes and $36.8 million from common stock sales under the Equity Shelf Program.
• Debt Structure: The Company assumed $59.4 million in mortgage debt in the CapitalSource deal but repaid it in February 2010 using proceeds from the new Senior Notes. The revolving credit facility balance was reduced to zero.

Guidance, Outlook, and Risks

• CapitalSource Acquisitions: The Company is proceeding with two major pending transactions:
  • HUD Portfolio: Expected closing in Q2 2010 for 40 facilities (approx. $270 million purchase price).
  • Option Exercise: Notice provided April 20, 2010, to acquire 63 additional facilities (approx. $295 million purchase price), expected to close in June 2010.
• Financing: In April 2010, the Company entered a new $320 million revolving credit facility, replacing the previous $200 million facility. The new facility includes an accordion feature to expand capacity to $420 million.
• Healthcare Reform Risks: The passage of the Patient Protection and Affordable Care Act (PPACA) introduces uncertainty regarding reimbursement rates for Medicare and Medicaid. Management notes that while operators may absorb moderate reductions, significant cuts could adversely affect their ability to meet lease obligations.
• Legal Proceedings: A lawsuit filed by LCT SE Texas Holdings regarding a right of first refusal on four facilities acquired from CapitalSource is ongoing. The Company believes the claim is defensible and is indemnified by CapitalSource.

Investor Verification Checklist

• CapitalSource Closing Conditions: Verify the status of third-party lender and governmental consents required for the HUD Portfolio and Option Portfolio closings.
• Reimbursement Impact: Monitor operator financial health and occupancy levels in light of potential Medicaid/Medicare reimbursement reductions under the Healthcare Reform Law.
• Debt Covenants: Confirm continued compliance with financial covenants (leverage, fixed charge coverage) under the new $320 million credit facility and Senior Notes.
• Owned/Operated Transition: Track the regulatory approval status for the transition of the two remaining owned-and-operated facilities to the new operator (Formation/Genesis).
• Dividend Sustainability: Assess the impact of increased interest expenses and potential operator rent deferrals on the ability to maintain the $0.32 quarterly common dividend.