OMEGA HEALTHCARE INVESTORS INC annual report, FY2015

Omega Healthcare Investors, Inc. — FY2015 Form 10-K Summary

Business context and reporting period

Omega is a self-administered healthcare REIT focused primarily on skilled nursing facilities, with additional assisted living, specialty, rehabilitation, acute care and mortgage investments. The filing covers the fiscal year ended December 31, 2015, with comparative information for 2014 and 2013.

On April 1, 2015, Omega completed its stock-for-stock merger with Aviv REIT and converted to an UPREIT structure. At year-end, Omega owned approximately 95% of Omega OP, with outside investors owning approximately 5%.

Financial performance and key metrics

Metric	2015	2014	Change
Operating revenue	$743.6 million	$504.8 million	+47.3%
Net income	$233.3 million	$221.3 million	+5.4%
Net income available to common stockholders	$224.5 million	$221.3 million	+1.4%
Diluted EPS	$1.29	$1.74	Declined due primarily to share issuance and merger-related dilution
NAREIT FFO	$455.3 million	$345.4 million	+31.8%
Cash flow from operating activities	$463.9 million	$337.5 million	+37.4%
Dividends paid	$358.2 million	$258.5 million	+38.6%

Operating expenses were $332.3 million, including $210.7 million of depreciation and amortization, $57.5 million of acquisition and merger costs, $17.7 million of real estate impairments and $7.9 million of provisions for uncollectible receivables. Income before other income and expense was $411.3 million.

Approximate margins were 55.3% for income before other income and expense, 31.4% for net income and 61.2% for NAREIT FFO. These are calculated from reported figures and should not be interpreted as operating or adjusted EBITDA margins.

Balance sheet, debt and liquidity

Total assets were $8.0 billion, compared with $3.9 billion at December 31, 2014.
Gross real estate investments were approximately $8.1 billion, versus $4.5 billion in 2014.
Total equity was $4.1 billion, including $362.9 million of noncontrolling interest.
Total debt was approximately $3.6 billion, representing approximately 46.5% of total capitalization. Reported debt fair value was approximately $3.6 billion.
Cash and cash equivalents were $5.4 million; restricted cash was $14.6 million. Management stated that operating cash flow, credit-facility availability and expected mortgage payoffs were adequate for the next twelve months.
Debt maturities include approximately $301.3 million in 2017, $231.3 million in 2018 and $381.4 million in 2019, with $2.67 billion due thereafter. The filing states that all debt covenants were satisfied at year-end.
The company had $230 million outstanding on its revolving facility at year-end. A January 2016 amendment added a $350 million term loan, with proceeds used primarily to reduce the revolver.

Material changes versus the prior comparable period

The Aviv merger added 342 facilities, two direct financing leases, a medical office building, mortgages and other investments. Omega issued approximately 43.7 million common shares and recorded preliminary goodwill of $630.4 million related to the merger.
Omega completed approximately $193.8 million of U.K. Care Homes acquisitions, approximately $228.7 million of U.S. acquisitions and $101.0 million of capital expenditure investments.
The year-end portfolio expanded to 949 facilities in 42 states and the United Kingdom, operated by 83 third-party operators, compared with 829 owned facilities in the 2015 property schedule and a substantially smaller portfolio in 2014. The portfolio included 782 SNFs, 85 ALFs, 16 specialty facilities, one medical office building, mortgage investments and properties held for sale.
Rental income increased to $606.0 million from $388.4 million, primarily from the Aviv merger, Care Homes and other acquisitions. Mortgage interest income increased to $68.9 million from $53.0 million.
Interest expense increased to $147.4 million from $119.4 million, while refinancing costs increased to $28.8 million from $3.0 million. The increases reflect greater borrowings, debt refinancing and early debt redemptions.
Omega redeemed its $200 million 7.5% notes due 2020 and $575 million 6.75% notes due 2022, issued $700 million of 4.5% notes due 2027 and $600 million of 5.25% notes due 2026, and added term-loan borrowings.
Seven SNFs were sold for approximately $41.5 million, producing a gain of approximately $6.4 million. Six SNFs generated impairment charges totaling $17.7 million.

Guidance, outlook, commentary and risks

The filing does not provide formal earnings or FFO guidance. Management stated that operator coverage ratios were strong and that operators could absorb moderate Medicare and Medicaid reimbursement reductions, but warned that significant reimbursement cuts or service restrictions could impair operator liquidity and rent or interest payments.

Key risks include Medicare and Medicaid reimbursement reductions, regulatory and licensing changes, quality-of-care enforcement, fraud-and-abuse requirements, labor costs and operator compliance.
Operator bankruptcies could delay rent and mortgage collections, limit remedies and require costly re-leasing or foreclosure efforts.
Omega depends on external debt and equity capital because REIT distribution requirements limit retained cash. Higher interest rates, credit-rating changes, covenant restrictions or adverse capital-market conditions could limit growth and refinancing capacity.
Real estate impairment, casualty, environmental, litigation, foreign exchange and U.K. operating risks may reduce asset values or cash flow.
Management recorded $3.0 million of reserves on loans at year-end, compared with none in 2014, and reported $203.9 million of net accounts receivable, including $175.7 million of straight-line rent receivables.
The Aviv purchase accounting remained provisional in certain areas. Fourth-quarter adjustments increased goodwill by approximately $79.0 million and increased rental income by $8.2 million, including $5.4 million attributable to earlier 2015 quarters.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.

Most important facts to verify

Reconcile reported portfolio counts and investment amounts after the Aviv merger, including owned facilities, direct financing leases, mortgages and held-for-sale properties.
Review operator concentration, coverage ratios, rent collections and the collectability of the large straight-line receivable balance.
Assess debt maturities, revolver usage, interest-rate exposure, covenant headroom and the impact of the January 2016 $350 million term loan.
Separate recurring operating performance from acquisition-related costs, refinancing charges, impairments, purchase-accounting adjustments and gains on asset sales.
Evaluate dividend coverage using recurring cash flow and FFO, noting that 2015 dividends included approximately $1.047 per share classified as return of capital for tax purposes.
Review subsequent events, including the February 2016 acquisition of 10 SNFs for approximately $169 million and the related-party history involving Laurel.