OMEGA HEALTHCARE INVESTORS INC quarterly report, Q2 FY2020

Omega Healthcare Investors, Inc. 10-Q Summary

Business Context and Reporting Period

Omega is a self-administered REIT operating through OHI Healthcare Properties Limited Partnership. It invests in healthcare real estate and provides financing to skilled nursing, assisted living, specialty, independent living and medical office operators in the U.S. and U.K. This combined filing covers the quarter and six months ended June 30, 2020; financial statements are unaudited.

Portfolio: 981 healthcare facilities in 40 states and the U.K., operated by 69 third-party operators.
Real estate investments represented approximately 97% healthcare facilities; the portfolio included 767 SNFs, 114 ALFs, 28 specialty facilities and two medical office buildings.
Omega owned approximately 97% of Omega OP at June 30, 2020.

Financial Performance and Key Metrics

Metric	Three Months Ended June 30	Six Months Ended June 30
Total operating revenues	$256.4 million, up 13.8%	$509.4 million, up 13.5%
Net income	$102.0 million, up 34.8%	$194.2 million, up 31.4%
Net income available to common stockholders	$99.3 million	$189.2 million
Diluted EPS	$0.43, versus $0.34	$0.83, versus $0.68
Nareit FFO	$186.5 million, up 18.6%	$367.5 million, up 21.9%
Net cash provided by operating activities	Not separately reported	$329.4 million, versus $265.4 million

Operating income was $156.5 million for the quarter and $304.3 million for the six months.
Approximate net income margins were 39.8% for the quarter and 38.1% for the six months, compared with 33.6% and 32.9%, respectively, in the prior-year periods.
Revenue growth primarily reflected the MedEquities merger, the 2019 Encore Portfolio Acquisition, other acquisitions and facility transitions, increased mortgage income and miscellaneous income.
Operating expenses increased to $112.7 million for the quarter and $219.8 million for the six months, driven primarily by higher depreciation, impairments and, for the six-month period, credit-loss provisions.
Cash, cash equivalents and restricted cash totaled $41.6 million at June 30, 2020, versus $34.1 million at June 30, 2019 and $33.4 million at December 31, 2019.

Balance Sheet, Debt and Liquidity

Total assets were $9.7 billion and total equity was $4.2 billion at June 30, 2020.
Total secured and unsecured borrowings were $5.23 billion, compared with $5.14 billion at December 31, 2019. Management described debt as approximately $5.3 billion, or 55.8% of total capitalization.
Debt included $216.4 million drawn on the revolving credit facility, $796.3 million of term loans, $386.0 million of secured borrowings and $3.83 billion of senior notes and other unsecured borrowings.
The revolving credit facility has a stated capacity of $1.25 billion. A precautionary $300 million draw made in the first quarter was repaid in June; the filing does not clearly state remaining availability after other borrowing considerations.
Management stated that operating cash flow, credit-facility availability, equity programs, facility sales and expected loan repayments are adequate to fund operations, debt service, capital improvements, dividends and investments for the next twelve months.
The Company remained in compliance with applicable debt covenants at June 30, 2020.
Remaining commitments for construction, capital improvements and other investments were $125.7 million.
Quarterly dividends remained $0.67 per share. Approximately $307.2 million was paid to common stockholders during the first six months.

Material Changes Versus the Prior Comparable Period

Revenue, net income, diluted EPS and Nareit FFO increased materially year over year, primarily because the 2019 acquisitions and related investments contributed a full or larger period of operating results.
Interest expense increased by $4.4 million in the second quarter and $9.1 million in the first six months, reflecting higher debt balances from prior investments and the Encore acquisition.
Real estate impairments increased to $12.0 million in the second quarter and $15.6 million for the first six months, versus $5.7 million for the comparable 2019 periods.
The Company adopted the current expected credit loss standard on January 1, 2020, recording an initial $28.8 million allowance and reducing equity by the same amount. The allowance reached $35.2 million at June 30, 2020.
Investing cash outflow increased to $96.7 million from $15.0 million, while operating cash flow increased to $329.4 million from $265.4 million.
Equity issuance declined sharply: six-month proceeds under the equity shelf program were $1.8 million versus $102.9 million in 2019. The dividend reinvestment plan was suspended in March 2020.

Guidance, Outlook, Risks and Unusual Items

Management did not provide formal quantitative earnings guidance. It stated that longer-term demographics should support demand for skilled nursing care, but near-term visibility remains limited.
COVID-19 had not materially reduced rental revenue through the first two quarters, and the Company reported collecting substantially all contractual rents due through July 2020. However, operators reported higher labor, PPE, testing and other costs, as well as occupancy declines.
As of July 30, 2020, operators reported 6,133 confirmed COVID-19 cases across 415 facilities, or 43.3% of operating facilities. The Company did not independently validate this information and cautioned that reported cases may be incomplete or delayed.
Government relief, Medicaid and Medicare reimbursement changes and continued federal and state support are important to operator liquidity. The ultimate sufficiency and duration of such support are uncertain.
Daybreak paid no rent during the first six months of 2020. A July forbearance and transition agreement contemplated selling 28 facilities for $100 million; their June 30 net book value was approximately $147 million. No definitive sale agreement had been executed as of August 7, 2020, and a future impairment of approximately $47 million could be required if the sale probability increases or the transition is unsuccessful.
The Company expected annual Daybreak rent or rent equivalents of $15 million to $17 million after restructuring, but disclosed that timing and ultimate proceeds remain uncertain.
An acute-care hospital sale price was reduced in July from $56.5 million to approximately $49.0 million, expected to generate an additional impairment or loss of approximately $7.4 million in the third quarter.
Agemo represented a material credit exposure. If Agemo cannot meet its obligations, the Company could need to reserve approximately $78.2 million of receivables, straight-line rent and lease inducements.
Subsequent to quarter-end, Maplewood received an expanded credit facility of approximately $220 million, partly to address COVID-19-related liquidity needs, and refinanced approximately $120 million of obligations to Omega.
The Second Circuit reinstated a securities class action against Omega and certain officers on August 3, 2020. The filing states that the Company believes the claims are without merit. A separate DOJ investigation involving the Lakeway Hospital concerns alleged False Claims Act, Stark Law and Anti-Kickback Statute violations; the filing does not provide a clear estimate of potential loss.

Important Facts for Investors to Verify

Whether COVID-19-related operator cost increases, occupancy declines or reduced government support ultimately affect rent collections and dividend coverage.
The status, financing and valuation of the proposed Daybreak portfolio sale or re-leasing plan, including the potential $47 million impairment.
The final third-quarter impact of the Nevada hospital sale-price reduction.
Agemo’s operating performance, cash collections and the potential $78.2 million reserve exposure.
Actual remaining availability under the $1.25 billion revolving credit facility and upcoming debt maturities or refinancing needs.
Progress and potential exposure related to the reinstated securities litigation and Lakeway DOJ investigation.
The sustainability of the $0.67 quarterly dividend relative to recurring cash flow, debt service and required REIT distributions.