OMEGA HEALTHCARE INVESTORS INC quarterly report, Q2 FY2012

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

Business Context and Reporting Period

Quarterly report for the three and six months ended June 30, 2012, filed August 7, 2012. Omega is a healthcare REIT focused primarily on skilled nursing facilities and other long-term-care real estate. Its portfolio consists principally of triple-net leases and fixed-rate mortgage loans.

Portfolio: 437 healthcare facilities in 34 states operated by 47 third-party operators.
Portfolio composition: 386 skilled nursing facilities, 10 assisted living facilities, five specialty facilities, mortgage investments on 32 skilled nursing facilities, and four facilities held for sale.
Gross real estate investment was approximately $2.8 billion; approximately 99% related to long-term-care facilities.
Largest operator concentration was CommuniCare at 12% of investments; Florida and Ohio represented 22% and 13% of investments, respectively.

Financial Performance and Key Metrics

Metric	Three Months Ended June 30, 2012	Three Months Ended June 30, 2011	Six Months Ended June 30, 2012	Six Months Ended June 30, 2011
Operating revenues	$83.8 million	$72.6 million	$168.3 million	$143.1 million
Income before other income and expense	$51.6 million	$38.6 million	$103.0 million	$53.3 million
Net income available to common stockholders	$30.6 million	$17.8 million	$56.7 million	$6.7 million
Diluted EPS	$0.29	$0.17	$0.54	$0.07
FFO available to common stockholders	$55.8 million	$42.6 million	$104.0 million	$81.7 million
Dividends per common share	$0.42	$0.38	$0.83	$0.75

Operating revenue increased 15.5% in the quarter and 17.6% year to date, primarily from 2011 acquisitions, lease amendments and extensions, new mortgage investments, and additional investment income.
Operating expenses declined to $32.3 million in the quarter and $65.3 million year to date, mainly because the prior-year periods included a $4.1 million provision for uncollectible receivables and a $24.4 million Connecticut real estate impairment charge.
Interest expense increased to $24.0 million in the quarter and $47.0 million year to date because of higher borrowings. Six-month results also included approximately $7.1 million of refinancing and debt redemption costs.
Quarterly income before other income and expense represented approximately 61.5% of revenue; the comparable six-month margin was approximately 61.2%.

Cash Flow, Balance Sheet, Debt and Liquidity

Net cash provided by operating activities was $94.4 million for the six months ended June 30, 2012, compared with $77.2 million in the prior-year period.
Net cash used in investing activities was $17.4 million, including acquisitions, mortgage placements, capital improvements, and other investments, partially offset by $22.0 million of real estate sale proceeds.
Net cash used in financing activities was $74.6 million, reflecting debt repayments, dividends, financing costs, and equity activity.
Cash and cash equivalents were $2.9 million at June 30, 2012, compared with $0.4 million at December 31, 2011. Restricted cash was $36.5 million.
Total assets were $2.55 billion and stockholders’ equity was $935.7 million at June 30, 2012.
Debt was approximately $1.5 billion, representing approximately 61.4% of total capitalization. Debt consisted primarily of $287.3 million of secured borrowings and $1.20 billion of unsecured borrowings, net.
The $475 million unsecured revolving credit facility had $2.0 million drawn and $473.0 million of availability at quarter-end; no letters of credit were outstanding. The facility matures August 17, 2015 and includes an accordion feature up to $600 million, subject to conditions.
Management stated that liquidity, operating cash flow, revolving-credit availability, and expected mortgage payoffs should be adequate for operations, debt service, dividends, and planned investments for the next twelve months.
The company was in compliance with all credit facility covenants at June 30, 2012.

Material Changes Versus the Prior Comparable Period

Net income available to common stockholders increased from $17.8 million to $30.6 million for the quarter and from $6.7 million to $56.7 million for the six-month period.
FFO increased 31.1% in the quarter and 27.3% year to date.
Prior-year earnings included the $24.4 million Connecticut impairment, a $4.1 million provision for uncollectible receivables, and owned-property operating expenses; these items were substantially absent in 2012.
Omega acquired five Indiana facilities on June 29, 2012 for approximately $25.1 million in total: four facilities for approximately $21.7 million and one facility for approximately $3.4 million.
Omega issued $400 million of 5.875% senior notes due 2024 and used proceeds partly to retire its $175 million of 7% notes due 2016 and reduce revolving-credit borrowings.
Four HUD mortgage notes were retired in June 2012, producing a net gain of approximately $1.7 million.
Omega sold several facilities during the first half of 2012, recognizing aggregate gains included in the $7.3 million gain on assets sold.
The company terminated its $140 million equity shelf program and entered into a new equity shelf program permitting up to $245 million of common-stock sales. No shares had been issued under the new program as of June 30, 2012.
Approximately 3.2 million common shares were issued through the dividend reinvestment plan for net proceeds of approximately $69.0 million during the first six months.

Guidance, Outlook, Risks and Unusual Items

No quantitative earnings guidance was provided in the filing.
Management expects to continue funding acquisitions and other investments through operating cash flow, available credit, equity issuance, asset sales, and other capital sources.
Key risks include operator financial condition, tenant and mortgage collectability, reimbursement reductions under Medicare and Medicaid, regulatory and licensing requirements, healthcare reform, quality-of-care enforcement, fraud-and-abuse rules, interest-rate changes, access to capital, credit ratings, and maintaining REIT qualification.
Operators are exposed to significant government reimbursement risk. The filing notes the fiscal 2012 Medicare reimbursement reductions and potential future Medicare and Medicaid cost controls.
The portfolio has operator and geographic concentration, and financial performance depends on the ability of third-party operators to meet lease and mortgage obligations.
At June 30, 2012, accounts receivable included $86.7 million of straight-line rent receivables and $21.0 million of lease inducements, net of a $2.5 million allowance.
Four skilled nursing facilities and one parcel of land remained held for sale with an aggregate net book value of approximately $2.1 million.
Management stated that pending litigation, individually or collectively, was not expected to have a material adverse effect on consolidated financial position or results of operations.
Fitch initiated investment-grade coverage in July 2012. Maintaining at least two investment-grade ratings would reduce the revolving facility pricing to a lower LIBOR-based margin range.

Important Facts for Investors to Verify

Reconcile recurring operating performance and FFO with reported net income, excluding gains on property sales and debt-related items.
Monitor tenant coverage, rent collections, straight-line receivables, lease inducements, and the $2.5 million allowance for potentially uncollectible amounts.
Assess leverage, refinancing requirements, interest costs, covenant compliance, and the availability of the $473.0 million revolving-credit capacity.
Evaluate the effect of Medicare and Medicaid reimbursement changes on operators’ ability to pay rent and mortgage interest.
Review the performance and credit quality of CommuniCare, Sun Healthcare, and other concentrated operators.
Track the contribution and final purchase-price allocation of the five Indiana facilities acquired on June 29, 2012.
Consider dilution and capital-raising risk from the dividend reinvestment program and the new $245 million equity shelf program.
Verify continued REIT qualification and the sustainability of the $0.42 quarterly common dividend.