Omega Healthcare Investors, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with the same period in 2016. Omega is a REIT focused on healthcare real estate, primarily skilled nursing facilities and, to a lesser extent, assisted living and other healthcare facilities. Its portfolio comprised 985 facilities in 42 states and the United Kingdom, operated by 77 third-party operators; approximately 99% of real estate investments related to long-term care facilities.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenues | $231.7 million | $212.9 million | +8.9% |
| Operating expenses | $92.5 million | $116.3 million | -20.5% |
| Income before other income and expense | $139.2 million | $96.5 million | +44.2% |
| Net income | $109.1 million | $58.2 million | +87.5% |
| Net income available to common stockholders | $104.4 million | $55.6 million | +88.0% |
| Basic diluted EPS | $0.53 | $0.30 / $0.29 | Improved |
| NAREIT FFO | $181.0 million | $153.6 million | +17.8% |
| Dividends declared per share | $0.62 | $0.57 | +8.8% |
Operating margin was approximately 60.1%, compared with 45.3% in the prior-year quarter. Net margin was approximately 47.1%, compared with 27.3%. Results benefited from higher rental income, lower impairment and acquisition costs, and a $10.4 million contractual settlement. These benefits were partly offset by higher interest expense and depreciation and amortization.
- Rental income increased $15.8 million, primarily from 2016 acquisitions and lease amendments.
- Other investment income increased $3.5 million, primarily from new notes and additional operator funding.
- Impairment losses declined to $7.6 million from $34.6 million.
- Interest expense increased $7.8 million, primarily because of higher debt balances used to fund investments.
- Cash flow from operations was $113.9 million, down from $127.2 million, primarily because of the timing of contractual receivable collections.
- Investing activities provided $16.4 million, versus $673.8 million used in the prior-year period. The change reflected lower acquisitions, more property-sale proceeds, fewer other investments and joint-venture distributions.
- Financing activities used $183.8 million, compared with $550.7 million provided in Q1 2016, reflecting net repayments under the credit facility, lower long-term borrowings and higher dividends.
- Cash and cash equivalents declined to $40.3 million from $93.7 million at December 31, 2016.
- Total assets were $8.8 billion, total equity was $4.2 billion and debt was $4.3 billion, representing approximately 50.5% of total capitalization.
Material changes and unusual items
- Omega acquired one assisted living facility in Virginia for approximately $7.6 million at an initial annual cash yield of 7.5%.
- The company sold 15 facilities for approximately $45.8 million of net proceeds and recognized a $7.4 million gain.
- Three facilities were impaired by approximately $7.6 million, primarily as part of exiting non-strategic facilities or operators. Nine facilities remained held for sale at March 31, 2017.
- Omega recorded a $10.4 million contractual settlement related to a contingent liability originating in 2012.
- On April 4, 2017, Omega issued $550 million of 4.75% senior notes due 2028 and $150 million of additional 4.50% senior notes due 2025. Net proceeds of approximately $690.7 million were used to redeem $400 million of 5.875% notes due 2024, prepay a $200 million term loan and repay revolving-credit borrowings.
- The company expects to record approximately $16.5 million of second-quarter 2017 redemption-related costs and write-offs, including an $11.8 million call premium and $4.7 million of deferred-financing-cost write-offs.
- The quarterly dividend was subsequently increased to $0.63 per share, payable May 15, 2017.
Guidance, outlook, risks and contingencies
Management stated that available liquidity, operating cash flow, credit-facility capacity and expected mortgage payoffs should be adequate over the next twelve months to fund operations, debt service, capital improvements, dividends and planned investments. The filing does not provide formal full-year earnings or FFO guidance.
- Key risks include operator financial condition, reimbursement reductions, Medicare and Medicaid changes, occupancy, regulatory compliance, bankruptcy-related lease rejection, and the ability to collect rent or interest.
- Healthcare reimbursement is subject to cost-control initiatives, value-based purchasing, Medicaid budget pressure, Medicare sequestration and therapy-cap rules.
- Changes in interest rates, credit ratings, capital-market access and financing costs may affect liquidity and investment activity.
- Property dispositions may not occur on the expected timetable or at carrying value. Future impairments could be material because fair-value estimates depend on market conditions, operator performance and projected cash flows.
- The company was in compliance with applicable debt covenants at March 31, 2017.
- Management believes pending litigation will not materially affect consolidated financial position or results of operations, but operators have responded to subpoenas and information requests from government authorities.
- Omega believes it continues to qualify as a REIT; failure to maintain REIT status could materially increase taxes and adversely affect results.
- ASU 2016-09 was adopted in 2017 without a material impact. Management expected ASU 2014-09 to have limited impact, while the effects of the new lease and credit-loss standards remained under evaluation.
Most important facts for investors to verify
- Reconcile the increase in GAAP earnings and FFO for the $10.4 million contractual settlement, lower impairments and property-sale gains.
- Assess operator coverage, rent collection and accounts receivable, which increased to $272.5 million from $240.0 million.
- Review the post-quarter-end refinancing, including the new notes, redeemed debt, term-loan prepayment and expected $16.5 million second-quarter charge.
- Monitor the nine facilities held for sale, the New Ark facility-sale agreements and potential additional impairments.
- Evaluate leverage, refinancing requirements and interest-rate exposure, particularly the term loans maturing in 2017 and 2019 and the revolving facility maturing in 2018.
- Confirm the sustainability of the $0.63 per-share dividend against recurring cash flow, REIT distribution requirements and future capital needs.
- Review Medicare, Medicaid and other regulatory developments affecting skilled nursing operators and tenant ability to pay.