Omega Healthcare Investors, Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011, with fourth-quarter information where disclosed. Omega is a self-administered healthcare REIT focused primarily on skilled nursing facilities, using long-term triple-net leases and fixed-rate mortgage financing. At year-end, the portfolio comprised 438 facilities in 35 states, operated by 51 third-party operators, with approximately $2.8 billion of gross investments and 48,140 beds. Reported facility occupancy was 84%.
Financial Performance and Position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total operating revenue | $292.2 million | $258.3 million | +13.1% |
| Income from continuing operations | $52.6 million | $58.4 million | -10.0% |
| Net income available to common stockholders | $47.5 million | $49.4 million | -3.8% |
| Diluted EPS | $0.46 | $0.52 | -11.5% |
| Funds from operations available to common stockholders | $172.5 million | $134.1 million | +28.6% |
| Net cash from operating activities | $169.8 million | $157.6 million | +7.7% |
- Rental income increased to $273.5 million from $232.8 million, primarily reflecting the full-year contribution from the 2010 CapitalSource acquisitions and the fourth-quarter 2011 White Pine and CFG acquisitions.
- Mortgage interest income increased to $16.3 million from $10.4 million, driven by new mortgage loans, including a $92.0 million Ciena loan and a $25.0 million White Pine loan.
- Operating expenses increased to $154.4 million from $109.4 million. Depreciation and amortization was $100.3 million, compared with $84.6 million.
- Operating income before other income and expense was $137.8 million, representing an approximate 47.2% operating margin. Net income available to common stockholders represented an approximate 16.2% revenue margin; FFO represented an approximate 59.0% revenue margin. These margins are not directly comparable because FFO is a non-GAAP measure.
- Results included $26.3 million of real estate impairment charges, compared with $0.2 million in 2010, and $6.4 million of provisions for uncollectible mortgages, notes and accounts receivable.
- Interest expense increased to $81.2 million from $67.3 million, reflecting higher borrowings used for acquisitions and new mortgages. Refinancing costs declined to $3.1 million from $19.5 million.
- Cash flow from investing activities was an outflow of $257.6 million, including $86.7 million for real estate acquisitions, $130.0 million for mortgage loan placements and $19.6 million for capital improvements.
Fourth-Quarter 2011 Results
| Metric | Q4 2011 |
|---|---|
| Revenue | $76.3 million |
| Net income | $19.3 million |
| Net income available to common stockholders | $19.3 million |
| Diluted EPS | $0.19 |
| Common dividend paid | $0.40 per share |
Fourth-quarter revenue increased from $71.1 million in the comparable 2010 quarter, while net income available to common stockholders increased from $2.7 million. The filing does not provide a complete quarter-specific cash flow statement or a separately reported Q4 FFO figure.
Balance Sheet, Debt and Liquidity
- Total assets were $2.56 billion, compared with $2.30 billion at December 31, 2010. Stockholders’ equity was $878.5 million, compared with $1.00 billion.
- Debt was approximately $1.55 billion on the consolidated balance sheet, including $272.5 million drawn on the revolving credit facility, $303.6 million of secured borrowings and $975.3 million of net unsecured borrowings. Management described debt as approximately 63.8% of total capitalization.
- The new $475 million unsecured revolving credit facility matures in August 2015 and had $202.5 million of availability at year-end. It includes an accordion feature permitting capacity expansion to $600 million.
- Contractual debt principal totaled $1.52 billion, with $277.5 million due in 2015 and $180.2 million due in 2016; $1.05 billion was due after 2016. Scheduled interest payments totaled $931.9 million.
- Cash and cash equivalents were only $0.4 million, down from $6.9 million. Restricted cash was $34.1 million, including $6.4 million of liquidity deposits, and operators provided $30.6 million of letters of credit.
- Management stated that operating cash flow, revolver availability and expected mortgage payoffs were adequate for operations, debt service, dividends and planned investments for the next twelve months.
- The company was in compliance with its debt covenants at December 31, 2011. A one-percentage-point increase in interest rates was estimated to reduce the fair value of long-term borrowings by approximately $91.1 million.
Material Changes and Unusual Items
- During the fourth quarter, Omega completed approximately $334 million of new investments: $128 million in 17 CFG SNFs, $86 million involving Persimmon and White Pine, a $92 million Ciena mortgage and a $28 million Signature term loan. Consideration included approximately $101 million of assumed HUD debt.
- Omega redeemed all outstanding 8.375% Series D preferred stock on March 7, 2011 for approximately $108.6 million, funded with borrowings. A $3.5 million write-off of preferred issuance costs reduced 2011 common-stock earnings by approximately $0.03 per share.
- The company recorded a $24.4 million impairment charge on four closed Connecticut facilities and is marketing them for uses other than skilled nursing care. Six facilities and one parcel of land were held for sale at year-end, with a net book value of approximately $2.5 million.
- Omega recorded a $4.1 million provision related to uncollectible straight-line rent and lease inducements associated with the FC/SCH transition, and a $2.3 million write-off of a Formation working-capital note.
- On January 1, 2012, facilities in Massachusetts, New Hampshire, Rhode Island and West Virginia were transitioned to Genesis under a new 12-year master lease. Vermont facilities remained subject to regulatory approval.
- The company authorized a $100 million common-stock repurchase program and repurchased 183,310 shares for approximately $2.9 million during 2011.
- Common dividends increased from $1.37 per share in 2010 to $1.55 per share in 2011. A $0.41 per-share dividend was declared in January 2012, up from $0.40 in the prior quarter.
Outlook, Risks and Contingencies
- Management believed operator coverage ratios were adequate to absorb moderate Medicare and Medicaid reimbursement reductions, but warned that larger cuts could weaken rent and mortgage payment capacity.
- The filing highlighted the expected 2013 automatic 2% reduction in Medicare provider payments, state Medicaid budget pressures, potential changes under healthcare reform, and continuing regulatory and reimbursement uncertainty.
- Key risks include operator bankruptcy or default, lease rejection, foreclosure delays, inability to re-lease closed facilities, occupancy and labor pressures, healthcare licensing requirements, fraud-and-abuse enforcement, quality-of-care sanctions and uninsured litigation liabilities.
- Revenue and cash flow are concentrated among certain operators. CommuniCare represented approximately 12% of investments and 13% of 2011 revenue; Sun represented approximately 8% of investments and 11% of revenue. Florida represented 22% of gross investments and Ohio 13%.
- Omega relies on external debt and equity capital because REIT distribution requirements limit retained cash. Adverse credit markets, higher interest rates, covenant restrictions or a credit-rating downgrade could restrict future acquisitions and refinancing.
- Maintaining REIT status remains material. Failure to satisfy REIT income, asset or distribution tests could subject the company to corporate-level taxation and could prevent REIT qualification for four subsequent years.
- The Connecticut facility closure and sale process, operator transitions, receivable collectability and the ability to refinance or repay 2015–2016 maturities are important ongoing contingencies.
Important Facts for Investors to Verify
- Reconcile the reported debt totals, including the approximately $1.55 billion balance-sheet amount, the $1.52 billion contractual principal schedule and management’s description of approximately $1.6 billion of debt.
- Assess the sustainability of $172.5 million of FFO and $161.9 million of 2011 dividends, including the effect of impairment charges, straight-line rent, non-cash items and the REIT distribution requirement.
- Review operator-level coverage, rent collections, security deposits, letters of credit and exposure to CommuniCare, Sun, Airamid and Signature.
- Evaluate the effect of Medicare and Medicaid reimbursement reductions, including the anticipated 2013 Medicare payment cut, on operator liquidity and lease coverage.
- Track the sale proceeds and any additional impairments for the closed Connecticut facilities and other assets held for sale.
- Confirm completion of the Genesis transition, including Vermont regulatory approval and the assumption of Formation-related notes.
- Review the 2015 revolving-credit maturity, 2016 senior-note maturity and compliance with leverage, fixed-charge coverage and distribution covenants.