Omega Healthcare Investors, Inc. — Q2 2015 Form 10-Q Summary
Business context and reporting period
Omega is a REIT focused on healthcare-related real estate and financing, primarily skilled nursing facilities, using triple-net leases and secured mortgage arrangements. The unaudited filing covers the quarter and six months ended June 30, 2015, with comparisons to the corresponding 2014 periods.
As of June 30, 2015, the portfolio included 936 healthcare facilities in 41 states, operated by 84 third-party operators. Approximately 99% of real estate investments were related to long-term care facilities. In April 2015, Omega completed its stock-for-stock merger with Aviv REIT and converted to an UPREIT structure; Omega owned approximately 95% of Omega OP.
Financial performance and key metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenues | $197.7 million | $121.8 million | $331.1 million | $242.8 million |
| Net income | $43.5 million | $46.8 million | $86.5 million | $102.6 million |
| Net income available to common stockholders | $41.4 million | $46.8 million | $84.5 million | $102.6 million |
| Diluted EPS | $0.22 | $0.37 | $0.53 | $0.81 |
| NAREIT FFO | $100.7 million | $79.7 million | $180.4 million | $164.1 million |
| Cash flow from operations | Not separately provided | Not separately provided | $193.1 million | $166.8 million |
Operating income before other income and expense was $74.3 million in Q2, producing an operating margin of approximately 37.6%, versus approximately 65.5% in the prior-year quarter. For the six-month period, the comparable margins were approximately 48.4% and 67.1%. The margin compression primarily reflected merger and acquisition costs, higher depreciation and amortization, and impairment charges.
- Rental income was $163.1 million in Q2 and $264.1 million for the six months.
- Interest expense was $38.2 million in Q2 and $70.6 million for the six months.
- Q2 acquisition costs were $47.1 million, compared with $0.05 million in Q2 2014; six-month acquisition costs were $52.0 million versus $0.1 million.
- Q2 impairment losses were $6.9 million; six-month impairment losses were $12.9 million.
- Four facilities were sold in Q2 for approximately $26.6 million of proceeds, generating an $8.8 million gain.
- Common dividends declared and paid were $0.18 per share in Q2 and $1.07 per share for the six months. A $0.55 per-share quarterly dividend was declared in July 2015.
Balance sheet, debt and liquidity
| Balance-sheet item | June 30, 2015 | December 31, 2014 |
|---|---|---|
| Total assets | $7.8 billion | $3.9 billion |
| Total equity | $4.1 billion | $1.4 billion |
| Cash and cash equivalents | $25.2 million | $4.5 million |
| Total debt, net | $3.4 billion | $2.4 billion |
| Accounts receivable, net | $189.0 million | $168.2 million |
Debt represented approximately 45.8% of total capitalization. Borrowings included $351.0 million on the revolving line, $500.0 million of term loans, $263.1 million of secured borrowings and $2.33 billion of unsecured borrowings. The revolving facility commitment was increased to $1.25 billion, implying approximately $899 million of capacity before other considerations. Management stated that liquidity, operating cash flow, credit facilities and expected mortgage payoffs were adequate for operations, debt service, dividends and planned investments over the next twelve months.
Six-month investing cash flow was an outflow of $124.7 million, including $183.8 million of real estate acquisitions. Financing cash flow was an outflow of $47.8 million after substantial debt repayments, $440.0 million of common-stock issuance proceeds and $151.4 million of dividends paid.
Material changes versus the prior comparable period
- The Aviv merger added 342 facilities, two direct financing leases, one medical office building and three mortgages. The transaction had estimated consideration of approximately $3.8 billion and resulted in approximately $48.5 million of 2015 acquisition-related costs.
- The May 2015 Care Homes transaction added 23 U.K. care homes with 1,018 beds for approximately $178 million; the recorded assets totaled approximately $193.8 million, including $15.7 million of goodwill.
- Goodwill increased from zero at year-end 2014 to $543.1 million, primarily from the Aviv merger and Care Homes transaction.
- The company issued 10.925 million common shares for net proceeds of approximately $440 million and issued additional shares through its dividend reinvestment plan.
- Omega redeemed its $200 million 7.5% notes due 2020, issued $700 million of 4.5% notes due 2027, repaid debt assumed from Aviv and paid off several HUD mortgage loans.
- Reported revenue increased substantially from acquired assets, but GAAP net income and diluted EPS declined because of acquisition costs, higher depreciation, increased interest expense, impairments and merger-related dilution. NAREIT FFO increased because it excludes certain real estate depreciation, impairment and disposition effects.
Outlook, commentary, risks and unusual items
Management reported that operator coverage ratios were adequate and believed operators could absorb moderate reimbursement reductions. The filing does not provide formal full-year revenue, earnings or FFO guidance. A proposed FY 2016 CMS rule was expected to increase aggregate SNF Medicare payments by approximately 1.4%, although reimbursement policy remained subject to change.
- Key risks include operator financial deterioration or bankruptcy, lease rejection, reimbursement reductions, Medicaid and Medicare policy changes, occupancy and regulatory compliance, healthcare fraud and abuse enforcement, quality-of-care requirements, interest-rate and capital-market conditions, credit ratings, and REIT qualification.
- Omega recorded a $6.9 million Q2 impairment for a Tennessee facility expected to close in Q3 and had $15.9 million of assets held for sale at June 30, 2015.
- Preliminary purchase accounting for Aviv and Care Homes remained subject to adjustment. The U.K. acquisitions produced a preliminary deferred tax liability of approximately $16 million.
- Management stated that it was incorporating Aviv’s internal controls into Omega’s control framework; disclosure controls were deemed effective as of June 30, 2015.
- The filing states that pending litigation, including previously disclosed Aviv merger-related shareholder claims, was not expected to have a material adverse effect; the consolidated shareholder actions had been dismissed and the appeal period had expired.
- After quarter-end, Omega purchased five Manhattan buildings for approximately $112 million and planned to co-develop them into a senior living facility.
Important facts for investors to verify
- Whether post-merger operator performance, rent coverage and collections support the enlarged portfolio and the assumptions underlying straight-line receivables and goodwill.
- The pace and cost of integrating Aviv’s operations and internal controls, and whether expected merger synergies are realized.
- Debt maturities, floating-rate exposure, covenant headroom and available capacity under the expanded revolving facility.
- The sustainability of dividends and NAREIT FFO after considering acquisition-related costs, interest expense, dilution and required REIT distributions.
- The effect of Medicare, Medicaid, reimbursement, quality-rating and regulatory changes on the company’s operators.
- The final purchase-price allocations for Aviv and Care Homes, including goodwill, deferred taxes and any subsequent impairment risk.