Omega Healthcare Investors, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the period ended June 30, 2013, filed August 5, 2013. Omega is a healthcare real estate investment trust focused primarily on financing and owning skilled nursing facilities through triple-net leases and secured mortgage loans. The portfolio comprised 480 healthcare facilities in 34 states operated by 47 third-party operators, with approximately 99% of real estate investments tied to long-term care facilities.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Operating revenues | $102.5 million | $83.8 million | $204.3 million | $168.3 million |
| Net income available to common stockholders | $49.1 million | $30.6 million | $87.2 million | $56.7 million |
| Diluted EPS | $0.42 | $0.29 | $0.76 | $0.54 |
| FFO available to common stockholders | $82.4 million | $55.8 million | $152.5 million | $104.0 million |
| Operating cash flow | Not separately provided | Not separately provided | $121.3 million | $94.4 million |
- Revenue increased 22.3% for the quarter and 21.3% year to date, primarily from 2012 acquisitions, a lease amendment and extension, and higher other investment income.
- Net income increased 60.5% for the quarter and 53.8% year to date. Results benefited materially from an $11.1 million refinancing gain related to the retirement of 11 HUD mortgages.
- Approximate operating margin was 63.1% for the quarter and 63.3% year to date, compared with 61.5% and 61.2%, respectively, in the comparable 2012 periods. Approximate net margin was 47.9% for the quarter and 42.7% year to date.
- FFO increased 47.7% for the quarter and 46.7% year to date. FFO is a non-GAAP measure and should not be viewed as a substitute for GAAP net income or liquidity.
- At June 30, 2013, total assets were $3.0 billion, stockholders’ equity was $1.1 billion, and total debt was approximately $1.7 billion, representing approximately 60% of total capitalization.
- Cash and cash equivalents were $7.0 million, compared with $1.7 million at December 31, 2012. Restricted cash was $40.1 million.
Material Changes Versus the Prior Comparable Period
- Rental income increased by $17.8 million in the second quarter and $35.0 million year to date, primarily from facilities acquired during 2012. The company recognized approximately $13.5 million and $27.0 million of related rental income in the quarter and six-month periods, respectively.
- A new master lease created approximately $2.9 million of additional second-quarter rental revenue and $5.9 million of additional year-to-date rental revenue compared with the prior leases.
- Operating expenses increased 17.1% for the quarter and 15.0% year to date, mainly due to higher depreciation and amortization from acquisitions.
- Interest expense increased $0.9 million for the quarter and $3.6 million year to date because of higher outstanding borrowings, partially offset by lower refinancing costs.
- Net cash provided by operating activities increased $26.9 million year to date. Investing cash outflows increased to $45.0 million, primarily due to investments in other investments and capital improvements. Financing cash outflows were $71.0 million.
- The company invested $24.9 million in a mezzanine loan bearing 12% annual interest and maturing in December 2017.
- One Texas facility was sold for approximately $2.2 million, producing a $1.2 million loss. Two skilled nursing facilities and one parcel of land remained held for sale at a combined net book value of approximately $1.0 million.
Debt, Liquidity, Capital Allocation, and Outlook
- Total borrowings declined from approximately $1.825 billion at December 31, 2012 to $1.707 billion at June 30, 2013.
- The $700 million unsecured credit facilities comprised a $500 million revolving facility and a $200 million term loan. Only $5.0 million was outstanding on the revolver, leaving $495 million of availability; the full $200 million term loan was outstanding.
- Omega refinanced approximately $59.4 million of Arkansas HUD mortgage debt, reducing the annual rate from 5.55% to approximately 3.06%, and retired 11 HUD mortgages for approximately $51.0 million. The company reported compliance with all applicable debt covenants.
- During the six months, the company issued approximately 2.3 million shares under its new $250 million equity shelf program for gross proceeds of approximately $72.8 million. It also issued approximately 1.5 million shares through its dividend reinvestment plan for net proceeds of approximately $41.6 million.
- The quarterly dividend increased to $0.46 per share for the second quarter. On July 16, 2013, the board declared a $0.47 per share dividend payable August 15, 2013.
- Management stated that cash from operations, available credit facilities, and expected mortgage payoffs should be adequate over the next twelve months to fund operations, debt service, dividends, and future investments. No formal earnings or FFO guidance was provided.
Risks, Contingencies, and Unusual Items
- Operator performance depends substantially on Medicare and Medicaid reimbursement, occupancy, regulatory compliance, labor and operating costs, and access to capital. Reimbursement reductions or changes in healthcare policy could weaken tenant coverage and payment capacity.
- Major concentrations existed with Genesis Healthcare, representing approximately 11% of investments and 13% of second-quarter operating revenue, and CommuniCare, representing approximately 10% of investments and 11% of second-quarter operating revenue. Florida, Ohio, and Indiana represented the largest state concentrations.
- Healthcare Reform Law implementation, Medicare sequestration, Medicaid budget pressures, quality-of-care initiatives, fraud-and-abuse enforcement, licensing requirements, and HIPAA compliance may adversely affect operators.
- Interest-rate changes, credit-rating changes, capital-market conditions, refinancing needs, and debt covenant requirements could affect liquidity and financing costs.
- Management disclosed ordinary-course litigation and stated that pending or threatened matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Omega’s REIT status is important to its tax position. Failure to qualify could result in material federal income taxes and reduce cash available for distribution.
- The second-quarter net income benefit included the unusual $11.1 million HUD refinancing gain, while the facility sale generated a $1.2 million loss.
Important Facts for Investors to Verify
- Reconcile reported net income and FFO, including the effect of the $11.1 million HUD refinancing gain and the $1.2 million property-sale loss.
- Assess tenant and operator concentration, especially Genesis and CommuniCare, and review changes in rent coverage and payment performance.
- Monitor Medicare and Medicaid reimbursement developments, including the effects of sequestration and possible state Medicaid reductions.
- Review debt maturities, variable-rate exposure, covenant compliance, available revolver capacity, and the decline in total borrowings.
- Evaluate whether operating cash flow supports the dividend and planned acquisitions after debt service, capital improvements, and other investments.
- Track execution of the $250 million equity shelf program and the potential dilution from additional share issuance.
- Confirm the company’s continuing REIT qualification and the status and collectability of straight-line rent and other receivables.