Business Context and Reporting Period
Omega Healthcare Investors, Inc. is a healthcare real estate investment trust focused primarily on skilled nursing facilities. Its portfolio consists mainly of triple-net leases and fixed-rate mortgage investments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, compared with the same periods in 2009.
At September 30, 2010, Omega owned or held interests in 396 healthcare facilities across 35 states, operated by 49 third-party operators. The portfolio included 370 skilled nursing facilities, 10 assisted living facilities, five specialty facilities, 10 mortgage-financed skilled nursing facilities, and one property held for sale.
Financial Performance and Position
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total operating revenues | $69.7 million | $49.8 million | $187.2 million | $148.1 million |
| Net income | $17.0 million | $21.1 million | $53.5 million | $65.9 million |
| Net income available to common | $14.7 million | $18.9 million | $46.7 million | $59.1 million |
| Diluted EPS | $0.15 | $0.22 | $0.50 | $0.71 |
| FFO available to common | $42.5 million | $30.0 million | $105.5 million | $92.1 million |
| Cash flow from operations | Not separately provided | Not separately provided | $110.4 million | $114.4 million |
Operating income before other income and expense was $37.0 million in the third quarter and $107.1 million for the first nine months. The resulting operating margins were approximately 53.1% and 57.2%, respectively, compared with approximately 62.3% and 61.0% in the comparable 2009 periods. Lower margins primarily reflect substantially higher depreciation and amortization following the CapitalSource acquisitions.
Common dividends declared and paid were $0.36 per share in the third quarter and $1.00 per share for the first nine months, compared with $0.30 and $0.90, respectively, in 2009. The board subsequently declared a $0.37 per-share common dividend payable November 15, 2010. The Series D preferred stock carries an 8.375% rate and a $108.5 million aggregate liquidation preference.
At September 30, 2010, total assets were $2.29 billion, stockholders’ equity was $1.02 billion, and total borrowings were $1.15 billion, compared with $738.1 million at December 31, 2009. Debt represented approximately 53% of total capitalization. Cash and cash equivalents were only $1.2 million, supplemented by $21.2 million of restricted cash.
The company had $143.0 million outstanding under its $320 million revolving credit facility, with $177.0 million of availability and no letters of credit outstanding. Management stated that liquidity, operating cash flow, credit availability, and expected mortgage payoffs were adequate for operations, debt service, dividends, and investments for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue increased 40% in the third quarter and 26% for the first nine months, driven primarily by the CapitalSource acquisitions and the conversion of four mortgage-financed facilities to leased properties.
- Rental income increased to $66.3 million in the third quarter from $41.2 million and to $165.0 million for the first nine months from $123.6 million.
- Depreciation and amortization rose to $27.7 million in the third quarter from $11.1 million and to $58.9 million for the first nine months from $33.0 million.
- Interest expense increased to $19.1 million in the third quarter from $9.2 million and to $47.4 million for the first nine months from $26.7 million, reflecting acquisition-related borrowings and other financing activity.
- Net income available to common declined despite higher revenue, while FFO increased because FFO excludes real estate depreciation and amortization.
- Operating cash flow declined modestly to $110.4 million from $114.4 million, while investing cash outflows increased sharply to $368.8 million, primarily because of $343.2 million of real estate acquisitions.
- The company completed the acquisition of 143 CapitalSource facilities for aggregate consideration of approximately $860 million across transactions completed in December 2009 and June 2010.
- Owned and operated facilities were fully transitioned to third-party operators effective June 1, 2010, eliminating related nursing home revenues and substantially reducing associated operating expenses.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No formal earnings or FFO guidance was provided in the filing.
- Management expects to use available credit capacity and operating cash flow for acquisitions, recurring obligations, debt service, and dividends. Future acquisition activity remains dependent on capital-market conditions and the availability and cost of financing.
- On October 4, 2010, Omega issued $225 million of 6.75% senior notes due 2022. Proceeds were used primarily to repay revolving credit borrowings and for general corporate purposes.
- On October 6, 2010, Omega repaid its $100 million GECC term loan, incurring a $3.0 million prepayment premium and expecting a non-cash deferred-financing-cost write-off of approximately $2.2 million in the fourth quarter.
- The company faces exposure to operator credit quality, bankruptcies, rent collection, occupancy, reimbursement rates, licensing, healthcare regulation, and Medicare and Medicaid funding. Healthcare reform and potential reductions in government reimbursement could impair operators’ ability to pay rent and debt service.
- Portfolio concentration is material: approximately 99% of real estate investments relate to long-term care facilities. The largest investment concentrations were Florida at 24%, Ohio at 14%, and Pennsylvania at 7%. The largest operators by investment were CommuniCare at 13%, Airamid at 11%, and Signature at 9%.
- A lawsuit by an affiliate of Mariner Health Care challenges rights of first refusal related to four facilities acquired from CapitalSource. Omega believes the litigation is defensible, and CapitalSource has agreed to indemnify Omega for related losses and reasonable legal expenses.
- Omega recorded approximately $3.7 million of miscellaneous income from a settlement with a prior tenant during the first quarter of 2010 and a gain of approximately $0.8 million from the retirement of mortgage-backed certificate securities.
- At September 30, 2010, Omega reported compliance with all property-level and corporate debt covenants and had approximately $143 million of floating-rate debt subject to interest-rate changes.
- The filing states that disclosure controls and procedures were effective as of September 30, 2010, with no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the CapitalSource portfolio produces the expected annualized revenue and operator performance, particularly after full-period integration.
- The sustainability of FFO and common dividends relative to debt service, preferred dividends, and acquisition-related financing costs.
- Refinancing requirements for the $310 million of 7% notes due in 2014 and the related maturity condition on the revolving credit facility.
- Operator concentration, rent coverage, payment history, and exposure to Medicare and Medicaid reimbursement reductions.
- The ultimate outcome and potential financial impact of the Mariner-related right-of-first-refusal litigation.
- Fourth-quarter effects of the GECC loan payoff, including the $3.0 million prepayment premium and approximately $2.2 million non-cash charge.
- Completion of the preliminary purchase-price allocations for the CapitalSource acquisitions and the resulting depreciation, lease amortization, and debt fair-value adjustments.