OMEGA HEALTHCARE INVESTORS INC quarterly report, Q3 FY2020

Omega Healthcare Investors, Inc. — 2020 Q3 Form 10-Q

Business context and reporting period

Omega is a healthcare real estate investment trust focused primarily on skilled nursing and assisted living facilities, with additional investments in specialty facilities, independent living facilities, medical office buildings, mortgages and operator loans. The filing covers the quarter and nine months ended September 30, 2020, and combines Omega Healthcare Investors, Inc. with its approximately 97%-owned operating partnership, OHI Healthcare Properties Limited Partnership.

At September 30, 2020, the portfolio included 976 healthcare facilities in 40 states and the United Kingdom, operated by 69 third-party operators. Approximately 97% of real estate investments related to healthcare facilities.

Key financial metrics

Metric	Q3 2020	Q3 2019	9M 2020	9M 2019
Total operating revenues	$119.2 million	$233.2 million	$628.6 million	$682.2 million
Operating income	$(39.5) million	$187.2 million	$264.8 million	$435.9 million
Net income	$(93.8) million	$142.9 million	$100.5 million	$290.8 million
Net income available to common stockholders	$(91.3) million	$138.7 million	$97.9 million	$281.6 million
Diluted EPS	$(0.40)	$0.63	$0.43	$1.32
Nareit FFO	$15.1 million	$163.1 million	$382.6 million	$464.4 million
Net cash provided by operating activities	Not separately provided	Not separately provided	$510.9 million	$405.8 million

Calculated operating margins were approximately negative 33.1% in Q3 2020 versus 80.3% in Q3 2019, and 42.1% for the first nine months of 2020 versus 63.9% in the comparable 2019 period. Net margins were approximately negative 78.7% and 16.0%, respectively.

The Q3 revenue decline primarily reflected a $142.3 million non-cash write-off of contractual rent receivables, straight-line rent receivables and lease inducements after three operators were placed on a cash basis. The filing states that the Company collected substantially all contractual rents due during the first three quarters of 2020, but accounting revenue was materially reduced by collectability reassessments.

Balance sheet, debt and liquidity

Total assets were $9.4 billion at September 30, 2020, compared with $9.8 billion at December 31, 2019.
Net real estate investments were $6.81 billion, down from $7.20 billion at year-end 2019.
Mortgage notes receivable, net, were $892.5 million; other investments, net, were $464.5 million.
Total secured and unsecured borrowings were $5.17 billion, representing approximately 57.0% of total capitalization. Debt was modestly above $5.14 billion at December 31, 2019.
Cash, cash equivalents and restricted cash totaled $40.1 million at September 30, 2020, versus $33.4 million at year-end 2019.
Net cash used in financing activities was $447.5 million for the first nine months, including approximately $459.7 million of dividends paid to common stockholders and $16.4 million distributed to outside Omega OP unitholders.
Management stated that cash from operations, credit facility availability, equity programs, asset sales and expected investment payoffs were adequate to fund operations, debt service, dividends and other needs for the next 12 months.
The Company was in compliance with applicable affirmative, negative and financial debt covenants at September 30, 2020.

Material changes versus the prior comparable period

Q3 operating revenues decreased $114.0 million, or approximately 48.9%, year over year; nine-month revenue decreased $53.6 million, or approximately 7.9%.
Q3 net income available to common stockholders changed from $138.7 million of income to a $91.3 million loss. Nine-month income declined approximately 65.2% to $97.9 million.
Q3 Nareit FFO declined approximately 90.7% to $15.1 million; nine-month Nareit FFO declined approximately 17.6% to $382.6 million.
Operating expenses increased to $157.9 million in Q3 from $99.1 million, driven by $28.1 million of real estate impairments, $32.1 million of credit-loss provision and higher depreciation.
For the first nine months, real estate impairments totaled $43.7 million versus $9.5 million in 2019, while the credit-loss provision totaled $33.6 million versus none in the prior-year period.
Omega adopted the current expected credit loss standard on January 1, 2020, recording a $28.8 million opening equity adjustment. Total allowances for loans and related commitments reached approximately $63.4 million at September 30, 2020.
Rental income was reduced by write-offs of approximately $64.9 million related to Genesis, $75.3 million related to Agemo and $2.1 million related to another operator. A one-time $55.4 million Maplewood payment was recorded as an adjustment to straight-line rent receivables and will be amortized over the remaining lease term.

Guidance, outlook, risks and unusual items

The filing does not provide a formal full-year earnings or FFO outlook. Management maintained the quarterly dividend at $0.67 per share through the first three quarters and stated that it would continue evaluating actions needed to preserve liquidity.

COVID-19: As of October 22, 2020, operators reported 7,735 confirmed cases among residents and employees across 464 facilities, or approximately 48.5% of operating facilities. Operators reported higher labor, personal protective equipment, testing and other costs, as well as occupancy pressure. Management could not estimate the ultimate financial impact.
Operator credit risk: Three operators reported substantial doubt regarding their ability to continue as going concerns. Agemo term loans were placed on a cash basis and received a $24.4 million credit-loss provision, with an additional $3.8 million reserve for related interest receivable.
Daybreak transition: A proposed $100 million sale of 28 Daybreak facilities was not completed. Omega is negotiating re-leasing or sales involving 31 facilities with a net book value of approximately $147 million. Management expects eventual annual rent or rent equivalents of $15 million to $17 million, but stated that timing and outcome are uncertain and further impairments are possible.
Asset sales and impairments: During Q3, Omega sold six facilities and a parcel of land for approximately $61.0 million of net proceeds and recognized a net loss of approximately $0.7 million. Thirteen facilities with a net book value of $35.9 million were classified as held for sale at quarter-end.
Debt refinancing after quarter-end: In October 2020, Omega issued $700 million of 3.375% senior notes due 2031 and used approximately $680.5 million of net proceeds to repay term loans and reduce other borrowings. It also paid approximately $11 million to settle interest-rate swaps.
Legal contingencies: A securities class action previously dismissed with prejudice was reinstated on appeal and a second amended complaint was filed in August 2020. The Company also faces derivative actions and a DOJ-related investigation involving the Lakeway Hospital joint venture. The filing states that the Company cannot determine whether a loss related to the DOJ matter is probable.

Important facts for investors to verify

Whether COVID-19-related occupancy declines, operating costs and government support materially affect operator rent coverage and future collections.
The ultimate collectability and collateral recovery for Genesis, Agemo and other operator loans, including the adequacy of the approximately $63.4 million credit-loss allowance.
The timing and economics of re-leasing or selling the 31 Daybreak-related facilities and the risk of additional impairments.
The sustainability of the $0.67 quarterly dividend relative to recurring cash flow, FFO and required debt service.
Post-quarter-end leverage, refinancing savings and covenant capacity after the $700 million senior-notes issuance and repayment of term loans.
The outcome and potential financial exposure from the securities litigation, derivative proceedings and Lakeway DOJ investigation.
Concentration risk from Ciena, which generated approximately 11% of total revenue, and geographic exposure to Florida, Texas and Michigan.