Business Context and Reporting Period
Omega Healthcare Investors, Inc. is a self-administered healthcare REIT operating through OHI Healthcare Properties Limited Partnership. The company invests primarily in triple-net leased skilled nursing and assisted living facilities, mortgages, and operator loans in the U.S. and U.K. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, with comparisons to the same 2018 periods.
At September 30, 2019, the portfolio included 936 healthcare facilities in 40 states and the U.K., operated by 73 third-party operators. Approximately 97% of real estate investments related to long-term care facilities. Omega owned approximately 97% of Omega OP.
Financial Highlights
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total operating revenues | $233.2 million | $221.9 million | $682.2 million | $661.9 million |
| Operating income | $187.2 million | $110.7 million | $435.9 million | $381.5 million |
| Net income | $142.9 million | $59.1 million | $290.8 million | $229.0 million |
| Net income available to common stockholders | $138.7 million | $56.6 million | $281.6 million | $219.4 million |
| Diluted EPS | $0.63 | $0.28 | $1.32 | $1.10 |
| Nareit FFO | $163.1 million | $160.6 million | $464.4 million | $462.5 million |
| Net cash provided by operating activities | Not separately reported | Not separately reported | $405.8 million | $348.5 million |
Q3 revenue increased approximately 5.1%, while nine-month revenue increased approximately 3.1%. Net income available to common stockholders increased approximately 145% in Q3 and 28% for the nine-month period. Reported diluted EPS increased to $0.63 from $0.28 in Q3 and to $1.32 from $1.10 for nine months. Approximate net margins were 59.5% for Q3 and 41.3% for the nine-month period; these results were significantly affected by asset-sale gains and other unusual items.
Balance Sheet, Debt, and Liquidity
- Total assets were $9.0 billion at September 30, 2019, compared with $8.6 billion at December 31, 2018.
- Total equity was $4.1 billion, compared with $3.8 billion at year-end 2018.
- Total secured and unsecured borrowings were $4.619 billion, versus $4.541 billion at December 31, 2018. Debt represented approximately 53.4% of total capitalization.
- Debt consisted primarily of $3.822 billion of senior notes and other unsecured borrowings and $794.9 million of term loans, net of financing costs. The revolving credit facility had no balance at September 30, 2019.
- On September 20, 2019, Omega issued $500 million of 3.625% senior notes due 2029 and received approximately $487.8 million of net proceeds, used to repay credit-facility borrowings and for general corporate purposes.
- Cash, cash equivalents, and restricted cash totaled $42.2 million at September 30, 2019, up from $11.7 million at December 31, 2018. Management stated that available liquidity was adequate for operations, debt service, dividends, and planned investments for the next twelve months.
- The company was in compliance with applicable debt covenants at September 30, 2019.
Cash Flow and Capital Allocation
| Cash flow item | 9M 2019 | 9M 2018 |
|---|---|---|
| Operating activities | $405.8 million | $348.5 million |
| Investing activities | $71.5 million provided | $150.6 million used |
| Financing activities | $446.2 million used | $283.1 million used |
| Dividends paid | $417.3 million | $395.7 million |
Investing cash flow benefited from $186.0 million of real estate sale proceeds and $88.7 million from the sale of a direct financing lease and related trust. Financing activity included net debt repayments, $107.0 million of equity-shelf proceeds, and $91.8 million of dividend-reinvestment-plan proceeds.
Material Changes and Unusual Items
- MedEquities merger: Completed May 17, 2019. Omega issued approximately 7.5 million shares and paid approximately $63.7 million in cash consideration. The merger added 33 leased facilities, four mortgages, other investments, and a 51% interest in the Lakeway Partnership. It contributed approximately $14.0 million of Q3 revenue and $21.1 million from closing through September 30.
- Acquisitions: 2019 acquisitions totaled approximately $590.2 million for 31 SNFs, two ALFs, 14 specialty facilities, and one medical office building. Initial annual cash yields ranged from 9.35% to 12.00%.
- Asset sales and gains: In Q3, the company sold 19 facilities for approximately $177.0 million of net proceeds and recognized a $53.1 million net gain. An unconsolidated joint venture also sold 14 SNFs and recognized a $64.0 million gain, of which Omega recognized a related equity-method gain.
- Impairments: Q3 real estate impairments were approximately $3.8 million in the financial statements; the MD&A describes approximately $5.7 million of facility impairments offset by $1.8 million of insurance proceeds. Nine-month real estate impairments were $9.5 million, and direct-financing-lease impairment was $7.7 million.
- Lease accounting: Adoption of Topic 842 resulted in approximately $11.1 million of initial non-cash right-of-use assets and lease liabilities. The company also recorded $9.8 million of variable rental income and $11.8 million of related real estate tax expense for the nine months.
- Operator collectibility: The company wrote off approximately $3.0 million of receivables and straight-line rent during Q3 after placing two operators on a cash basis. Year-to-date write-offs related to operator collectibility totaled approximately $10.9 million.
- Dividends: Quarterly dividends were $0.66 per share for the first three quarters of 2019; a $0.67 dividend was declared for payment in November 2019.
Guidance, Outlook, Risks, and Contingencies
- Management expects 2019 dividends to exceed taxable income and believes liquidity is sufficient for the next twelve months, but did not provide formal earnings or FFO guidance in the provided filing.
- Daybreak continued to experience liquidity and operating pressure from lower occupancy, declining quality mix, labor costs, and legacy expenses. Management received only $0.75 million of cash rent from Daybreak in Q3 and does not expect identified benefits to materially improve liquidity before Q1 2020.
- Omega is evaluating a restructuring of the Daybreak portfolio and expects potential annual rent or rent equivalents of approximately $15 million to $20 million after transitioning selected facilities, although timing and outcome are uncertain.
- Medicare payment changes, including the October 2019 Patient-Driven Payment Model, quality-based reimbursement, and a projected 2.4% FY 2020 SNF payment increase, may affect operator performance. Medicaid reimbursement reductions, regulatory compliance, occupancy, labor costs, and operator bankruptcies remain material risks.
- The company had approximately $156.7 million of remaining commitments for construction, capital improvements, and other projects.
- Omega disclosed a Department of Justice investigation involving alleged False Claims Act, Stark Law, and Anti-Kickback Statute issues related to Lakeway Hospital. The company is cooperating and cannot determine whether a loss is probable.
- A securities class-action dismissal was on appeal, and related derivative actions remained stayed. Other MedEquities-related litigation remained pending; management believes the claims are without merit.
- Maximum exposure to loss from the Agemo variable-interest entity was approximately $106.9 million at September 30, 2019.
- On October 31, 2019, after quarter-end, Omega completed the $735 million Encore Portfolio acquisition of 60 facilities, funded with approximately $346 million of cash and assumed HUD-insured mortgage debt of approximately $389 million. On October 30, 2019, it also agreed to acquire a 49% interest in a U.K. portfolio for approximately $90 million, subject to closing conditions.
Important Facts for Investors to Verify
- Reconcile reported net income and FFO to recurring rental cash flow, excluding the substantial Q3 asset-sale gains and other nonrecurring items.
- Assess operator concentration and credit quality, including Ciena’s approximately 11% revenue contribution, Agemo exposure, Daybreak’s rent shortfalls, and the collectibility of straight-line rent receivables.
- Review pro forma leverage and liquidity after the October 2019 Encore acquisition, assumed mortgage debt, and any settlement of the $300 million forward equity sales agreement.
- Monitor the Lakeway DOJ investigation, related litigation, and potential financial or regulatory consequences.
- Evaluate the effect of Medicare and Medicaid reimbursement changes, PDPM implementation, staffing requirements, and healthcare regulatory developments on tenants’ ability to pay rent.
- Confirm completion and valuation of the proposed U.K. joint-venture acquisition and the timing of the planned disposition of assets held for sale.