OMEGA HEALTHCARE INVESTORS INC quarterly report, Q1 FY2016

Omega Healthcare Investors, Inc. — Q1 2016 Form 10-Q Summary

Business context and reporting period

Omega is a Maryland REIT focused on healthcare-related real estate and financing, primarily skilled nursing facilities. Its portfolio consists principally of triple-net leases, fixed-rate mortgages, direct financing leases and secured operator loans in the United States and United Kingdom.

The filing covers the unaudited three months ended March 31, 2016, compared with the three months ended March 31, 2015. At March 31, 2016, Omega had 985 healthcare facilities in 42 states and the United Kingdom, operated by 83 third-party operators. Approximately 99% of real estate investments related to long-term care facilities.

Key financial metrics

Metric	Q1 2016	Q1 2015	Change
Operating revenues	$212.9 million	$133.4 million	+59.6%
Income before other income and expense	$96.5 million	$85.9 million	+12.3%
Net income	$58.2 million	$43.1 million	+35.2%
Net income available to common stockholders	$55.6 million	$43.1 million	+29.1%
Basic/diluted EPS	$0.30/$0.29	$0.32/$0.32	Lower due primarily to share count growth
NAREIT FFO	$153.6 million	$79.6 million	+92.9%
Net cash provided by operating activities	$127.2 million	$103.3 million	+23.1%

Operating margin before other income and expense was approximately 45.4%, compared with 64.4% in the prior-year quarter. Net income margin was approximately 27.3%, and net income available to common stockholders represented approximately 26.1% of revenue. The filing does not present a comparable adjusted EBITDA margin.

Rental income was $176.7 million, up from $101.0 million, primarily reflecting the Aviv Merger and subsequent acquisitions.
Depreciation and amortization increased to $62.4 million from $30.6 million.
Interest expense increased to $37.2 million from $32.4 million, while refinancing costs declined to $0.3 million from $9.4 million.
Common dividends declared were $0.57 per share; the board subsequently declared a $0.58 per share dividend payable in May 2016.
Total assets were $8.62 billion and total equity was $4.05 billion at March 31, 2016.

Cash flow, debt and liquidity

Operating cash flow was $127.2 million. Investing activities used $673.8 million, primarily for $416.1 million of real estate acquisitions, a $113.8 million deposit for a United Kingdom acquisition completed April 1, and $116.0 million invested in other investments.
Financing activities provided $550.7 million, including $300.0 million of net credit-facility borrowings, $350.0 million of other long-term borrowings, and $19.6 million from the dividend reinvestment plan. Dividends paid totaled $107.5 million.
Cash and cash equivalents were $9.4 million at quarter-end, compared with $5.4 million at December 31, 2015. Management stated that operating cash flow, credit-facility availability and expected mortgage-payoff proceeds were adequate for operations, debt service, dividends and planned investments for the next 12 months.
Total debt, net of discounts, was $4.22 billion, compared with $3.57 billion at year-end 2015. Debt represented approximately 51.0% of total capitalization.
Borrowings included $530.0 million under the revolving credit facility, $1.10 billion of term loans, $235.9 million of secured borrowings and $2.35 billion of unsecured borrowings. The company was in compliance with its debt covenants.
On January 29, 2016, Omega added a $350 million senior unsecured Tranche A-3 term loan facility maturing in 2021. The facility bears interest at LIBOR plus a rating-based spread beginning at 150 basis points.

Material changes versus the prior comparable period

Revenue growth was primarily attributable to $57.8 million of additional rental income from the Aviv Merger, $3.5 million from the Care Homes Transaction and $12.3 million from other acquisitions and lease amendments.
Operating expenses increased $68.9 million, driven by higher depreciation and amortization, a $28.6 million increase in real estate impairment charges, higher uncollectible receivable provisions and higher general and administrative expenses.
Net income available to common stockholders increased, but basic EPS declined from $0.32 to $0.30 because weighted-average basic shares increased from 134.3 million to 188.2 million following the Aviv Merger and other equity activity.
NAREIT FFO increased substantially because of the larger post-merger portfolio and the add-back of higher depreciation, amortization and impairment charges.
The company recorded $34.6 million of impairments on 14 facilities and classified 24 additional facilities for sale. Assets held for sale increased to $73.6 million from $6.6 million at year-end.
The company wrote off approximately $3.4 million of straight-line rent receivables related to a former operator after transitioning 27 facilities to a current operator.
Q1 2016 acquisitions totaled approximately $443.6 million for 34 SNFs and four assisted living facilities. The largest transaction was a $169.0 million related-party acquisition of 10 SNFs from Laurel Healthcare Holdings, subsequently leased to an unrelated operator.

Outlook, commentary, risks and unusual items

No quantitative full-year earnings or FFO guidance is provided in the filing. Management expressed confidence in liquidity for the next 12 months but noted dependence on operating cash flow, capital-market access, credit-facility availability and asset-sale or mortgage-payoff proceeds.
On April 1, 2016, Omega acquired 10 United Kingdom care homes for approximately $114 million and leased them to an existing operator at an initial annual cash yield of 7%.
On April 29, 2016, four held-for-sale facilities were sold for approximately $24 million. The operator also paid approximately $55 million to retire approximately $50 million of mortgages and other investments.
Key risks include operator financial condition, reimbursement reductions under Medicare and Medicaid, healthcare regulation, occupancy, litigation, bankruptcy or lease rejection by operators, asset-sale execution, interest rates, credit ratings, capital availability and maintenance of REIT status.
Management stated that operator coverage ratios were adequate and that operators could absorb moderate reimbursement reductions, but significant reimbursement or regulatory changes could impair tenant performance and rent collections.
Other unusual items included $4.7 million of foreign-currency translation loss and $8.9 million of cash-flow-hedge loss in other comprehensive income.
Pending litigation was described as arising in the ordinary course, with management stating that it was not expected to have a material adverse effect. Disclosure controls were concluded to be effective as of March 31, 2016.
ASU 2015-02 was adopted during the quarter with an immaterial effect. The company was evaluating the future effects of new accounting guidance on financial instruments, leases and stock compensation.

Most important facts for an investor to verify

Whether the substantial post-Aviv acquisition growth is translating into sustainable cash earnings after higher leverage, depreciation and amortization.
The quality and collectability of receivables, including the $3.4 million straight-line rent write-off and the $5.1 million provision for uncollectible mortgages, notes and accounts receivable.
The valuation and timing of sales for the 25 facilities classified as held for sale at March 31, 2016, including the $34.6 million impairment charge.
Debt maturities, floating-rate exposure, covenant headroom and the effect of the increase in debt to $4.22 billion.
Operator coverage, reimbursement exposure and financial condition, particularly for skilled nursing operators dependent on Medicare and Medicaid.
The sustainability of the dividend relative to operating cash flow, taxable income and non-GAAP NAREIT FFO.
The execution and returns of the 2016 acquisition program, including related-party transactions and United Kingdom expansion.