OMEGA HEALTHCARE INVESTORS INC quarterly report, Q1 FY2023

Omega Healthcare Investors, Inc. — Q1 2023 Form 10-Q Summary

Business context and reporting period

Omega is a healthcare REIT focused primarily on skilled nursing facilities and assisted living facilities, with additional investments in independent living, specialty facilities, medical office buildings, real estate loans and operator loans in the U.S. and U.K. The filing covers the three months ended March 31, 2023, compared with the same period in 2022. The portfolio included 931 healthcare facilities operated by 68 third-party operators, with approximately 97% of real estate investments related to long-term healthcare facilities.

Key financial metrics

Metric	Q1 2023	Q1 2022	Change
Total revenues	$218.2 million	$249.3 million	Down $31.1 million
Net income	$36.8 million	$195.2 million	Down $158.3 million
Net income available to common stockholders	$35.9 million	$189.6 million	Down $153.7 million
Basic and diluted EPS	$0.15	$0.79	Down $0.64
Nareit FFO	$146.1 million	$170.7 million	Down $24.6 million
Cash flow from operations	$111.4 million	$132.2 million	Down $20.8 million
Cash, cash equivalents and restricted cash at period end	$248.5 million	$494.8 million	Down $246.3 million year over year
Total debt, net	$5.3 billion	Not stated in the same table	Debt represented 59.1% of total capitalization

Revenue declined primarily because of lower cash rent and non-accrual interest from distressed operators, including Maplewood and LaVie, and a $12.5 million Maplewood option termination fee recorded as a reduction of rental income. Net income available to common stockholders represented approximately 16.5% of revenue, compared with approximately 76.1% in Q1 2022; the comparison was substantially affected by the prior-year $113.6 million gain on asset sales and the current-year $39.0 million of real estate impairments.

Rental income was $189.1 million, down $27.8 million.
Interest income was $28.4 million, down $2.7 million.
Interest expense was $58.5 million, broadly comparable with $58.1 million in the prior year.
Real estate impairments increased to $39.0 million from $3.5 million.
The company recorded a $4.1 million recovery of credit losses, compared with a $1.8 million provision in Q1 2022.
Net proceeds from asset sales were $17.6 million, generating a $13.6 million gain, versus $332.6 million of proceeds and a $113.6 million gain in Q1 2022.
Common dividends declared were $0.67 per share; $157.4 million of dividends were paid during the quarter.

Liquidity, debt and capital resources

Debt consisted primarily of $4.9 billion of senior notes and other unsecured borrowings, $364.8 million of secured borrowings and $19.8 million drawn under the revolving credit facility.
The weighted average annual interest rate on debt was 4.1%, and 98% of debt with outstanding principal balances had fixed interest payments.
Liquidity included approximately $245 million of cash and $1.43 billion of availability under the $1.45 billion senior unsecured revolving credit facility.
The company expected to repay the $350 million of 4.375% senior notes due August 2023 using available cash and revolving credit proceeds. It also had $400 million of 4.95% notes due April 2024.
Management stated that existing liquidity sources were expected to fund cash needs for the next twelve months, including dividends, debt service, investments and operating expenses.
The company was in compliance with applicable debt covenants at March 31, 2023.
Remaining commitments totaled $381.9 million, including $224.1 million of lessor construction and capital commitments, $58.1 million of other real estate loan commitments and $95.4 million of non-real estate loan commitments.

Material changes and unusual items

The company acquired six U.K. assisted living facilities for $26.4 million at an initial cash yield of 8.0%.
It sold two facilities for approximately $17.6 million of net cash proceeds and recorded a $13.6 million gain.
It recorded $39.0 million of real estate impairments on four facilities, including a $27.5 million impairment related to a held-for-use facility that was closed.
Omega restructured its Agemo relationship, reduced monthly contractual rent from $4.8 million to $1.9 million, extended the lease to 2036 and refinanced obligations into replacement loans totaling $82.2 million. No Agemo rental or interest income was recorded in Q1 2023.
Omega allowed eight operators to defer $24.4 million of contractual rent and interest and permitted the application of $5.2 million of collateral.
Maplewood rent was fixed at $69.3 million annually, lease escalators were deferred, and its secured revolving credit facility was extended to 2035 and increased to $320.0 million. Interest was converted largely or entirely to payment-in-kind interest during the initial restructuring period.
Seventeen operators remained on a cash basis of revenue recognition, representing 25.1% of total revenues excluding write-offs. Forty-three facilities were transitioned from three cash-basis operators to new operators recognized on a straight-line basis.
The allowance for credit losses increased to $209.5 million from $188.4 million, including a $25.2 million additional reserve related to deferred Agemo rent.
Subsequent to quarter end, Guardian-related facilities were sold and the Guardian mortgage loan was paid down by $35.2 million. Omega also committed up to $222.6 million for a West Virginia operator acquisition, including facility purchases and operator loans.

Outlook, management commentary and risks

The filing provides no formal earnings or FFO guidance. Management stated that near-term uncertainty remains elevated because operators continue to face labor shortages, higher wages and agency staffing costs, lower-than-pre-pandemic occupancy, inflation, reimbursement uncertainty and the expiration of COVID-19-related regulatory waivers and enhanced Medicaid support.

The federal public health emergency was scheduled to end May 11, 2023, with associated waivers and enhanced reimbursement support being reduced or eliminated.
Operators are exposed to Medicare and Medicaid reimbursement changes, including the phase-out of enhanced Medicaid funding and the phased-in Medicare PDPM parity adjustment.
Potential minimum staffing requirements, increased inspections, quality-based reimbursement and regulatory scrutiny of REIT relationships could increase operator costs or reduce profitability.
Operator bankruptcies, lease rejections, rent deferrals, non-accrual loans and the inability to re-lease or sell underperforming assets could reduce cash collections and asset values.
Maplewood, LaVie, Agemo and other distressed operators remain important credit and concentration exposures. Maplewood represented approximately 8.2% of revenue excluding write-offs in Q1 2023.
Omega is subject to a securities class action settlement with a $30.75 million payment funded by directors’ and officers’ insurance; the company had recorded a $31 million reserve and corresponding insurance receivable.
Management stated that disclosure controls and procedures were effective and that there were no material changes to internal control over financial reporting.

Important facts for investors to verify

Whether operator occupancy, staffing costs and cash rent collections improve after the end of pandemic-era support.
The repayment or refinancing of the $350 million senior notes due August 2023 and the $400 million notes due April 2024.
Actual collections and restructuring outcomes for Agemo, Maplewood, LaVie, Healthcare Homes and other cash-basis operators.
Changes in the $209.5 million credit-loss allowance and the carrying values of impaired or held-for-sale facilities.
Execution and funding of the $381.9 million of remaining commitments and the $222.6 million West Virginia investment announced after quarter end.
Future dividend coverage using recurring cash flow and Nareit FFO rather than gains on asset sales or collateral applications.
Developments in the securities litigation, Gulf Coast subordinated debt dispute and other legal proceedings.