OMEGA HEALTHCARE INVESTORS INC quarterly report, Q1 FY2022

Omega Healthcare Investors, Inc. — Q1 2022 Form 10-Q Summary

Business context and reporting period

Omega is a healthcare real estate investment trust focused primarily on skilled nursing facilities and assisted living facilities, with additional investments in independent living, specialty facilities, medical office buildings, mortgage loans and operator working-capital loans. The portfolio spans the U.S. and U.K. and is operated as one reportable segment.

This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. At March 31, 2022, the portfolio included 962 healthcare facilities in 42 states and the U.K., operated by 65 third-party operators.

Key financial metrics

Metric	Q1 2022	Q1 2021	Change
Total revenue	$249.3 million	$273.8 million	Down $24.5 million
Net income	$195.2 million	$164.4 million	Up $30.8 million
Net income available to common stockholders	$189.6 million	$160.0 million	Up $29.6 million
Basic and diluted EPS	$0.79	$0.69	Up $0.10
Nareit FFO	$170.7 million	$170.2 million	Up $0.4 million
Net cash from operating activities	$132.2 million	$176.0 million	Down $43.8 million

Net margin was approximately 78.3% in Q1 2022 versus 60.0% in Q1 2021; the comparison was substantially affected by gains on asset sales. Nareit FFO per share was not clearly provided in the filing excerpt.

Rental income was $216.9 million, down $20.9 million year over year.
Mortgage interest income was $20.5 million, down $3.1 million.
Total expenses were $167.7 million, down $23.4 million, primarily because Q1 2021 included substantially higher real estate impairments and debt-extinguishment-related costs.
Gain on assets sold was $113.6 million, compared with $100.3 million in Q1 2021.
Cash, cash equivalents and restricted cash totaled $494.8 million at March 31, 2022, compared with $24.4 million at December 31, 2021.
Total assets were $10.0 billion and total equity was $4.1 billion at quarter-end.
Total debt was approximately $5.6 billion, representing approximately 57.9% of total capitalization. The weighted-average interest rate was 3.96%, and 92% of debt with outstanding principal balances had fixed interest payments.
Debt included $354.9 million drawn on the revolving credit facility, $379.6 million of secured borrowings and $4.9 billion of senior notes and other unsecured borrowings, net.
Management reported compliance with all applicable debt covenants.

Material changes versus the prior comparable period

Revenue declined primarily because Agemo and Guardian were on cash-basis accounting and generated no recorded revenue, and because Gulf Coast facilities generated no rental income during transition and bankruptcy-related activities.
Operating cash flow decreased 25% year over year, reflecting lower rental and mortgage revenue and increased receivables.
Investing cash flow changed from a $396.3 million use in Q1 2021 to a $177.3 million source in Q1 2022. The change primarily reflected lower acquisitions and higher proceeds from asset sales.
Omega acquired $108.5 million of real estate assets, including 30 facilities, at initial cash yields of 8.0% to 9.5%.
Omega sold 27 facilities for approximately $332.6 million of net proceeds and recognized a $113.6 million gain. The sales primarily involved 22 former Gulf Coast facilities.
Real estate impairments fell to $3.5 million from $28.7 million.
Nareit FFO was broadly flat despite the decline in rental revenue, reflecting the exclusion of gains, depreciation, amortization and real estate impairments.
Omega repurchased 980,530 common shares for $27.3 million at an average price of $27.84 per share. The company authorized a $500 million repurchase program through March 2025.
No shares were issued under the 2021 ATM program during the quarter; approximately $929.9 million remained available under that program at March 31, 2022.

Guidance, outlook, management commentary, risks and unusual items

The filing does not provide formal earnings or financial guidance. Management stated that available operating cash flow, asset-sale proceeds, borrowing capacity and equity-market access were expected to fund cash needs for at least the next twelve months, including dividends, debt service, investments and recurring expenses.

Operator collectibility: Agemo and Guardian continued not to pay contractual rent and interest. No revenue was recorded from either operator in Q1 2022. Omega recorded a $4.7 million credit-loss provision related to the Agemo working-capital loan and a $5.1 million credit-loss recovery related to the Guardian mortgage after a $21.7 million principal repayment.
Guardian restructuring: In April 2022, Omega agreed to extend lease and loan terms, sell or transition facilities, reduce aggregate rent and mortgage interest to $24.0 million after specified transactions, and permit up to $18.0 million of deferred rent and interest subject to repayment conditions. Guardian made a partial payment after exhausting the permitted deferral.
Other payment issues: Two additional operators representing an aggregate 6.1% of Q1 revenue, excluding write-offs, missed contractual rent payments and received short-term deferrals or applied security deposits. Three other operators used $1.3 million of security deposits to pay rent; management reported those operators were current as of April 30, 2022.
COVID-19 and operating environment: Staffing shortages, elevated labor and personal protective equipment costs, reduced occupancy, vaccine mandates, repayment of government-supported advances and uncertain government relief continued to pressure operators. Average occupancy had not returned to pre-pandemic levels.
Reimbursement and regulation: Operators remain exposed to Medicare and Medicaid reimbursement changes, quality-based payment programs, minimum staffing requirements, inspections and healthcare-law enforcement.
Concentration: LaVie represented approximately 11.3% of Q1 revenue and Maplewood approximately 9.0%. Florida, Texas and Michigan represented the largest state concentrations of investments at 13%, 10% and 7%, respectively.
Commitments: Remaining commitments for construction, capital improvements and other commitments were $220.9 million, excluding approximately $41.2 million of remaining commitments under other investment loans.
Legal matters: The company disclosed securities and derivative litigation, a dispute concerning Gulf Coast subordinated debt, and a Department of Justice investigation involving Lakeway Hospital-related arrangements. Management stated that it could not predict certain outcomes but did not believe pending matters would have a material adverse effect; no clear loss estimate was provided.
Accounting and interest-rate matters: The company was evaluating the impact of ASU 2022-02 and the transition from LIBOR. Five forward-starting interest-rate swaps had $400 million of notional value, and foreign-currency forwards had £174 million of notional value at quarter-end.

Most important facts for investors to verify

Whether Agemo, Guardian and other stressed operators resume timely contractual payments and whether additional rent deferrals, write-offs, impairments or credit-loss provisions are required.
Completion, pricing and proceeds from the Guardian facility sales and other assets held for sale.
The sustainability of operating cash flow and Nareit FFO after excluding asset-sale gains and considering lost revenue from non-accrual operators.
Debt maturities, refinancing costs, revolving-credit utilization, covenant compliance and sensitivity to higher interest rates or credit-rating changes.
Whether occupancy, staffing levels, reimbursement rates and government support for skilled nursing and assisted living operators improve or deteriorate.
The outcome and potential financial exposure from the disclosed litigation, Lakeway DOJ investigation and Gulf Coast subordinated-debt dispute.
Progress on the $220.9 million of remaining capital commitments and the additional $41.2 million of other-investment funding commitments.