Omega Healthcare Investors, Inc. — FY2010 Form 10-K Summary
Business context and reporting period
Omega is a self-administered Maryland REIT focused primarily on long-term healthcare facilities, especially skilled nursing facilities, financed through triple-net leases and fixed-rate mortgage loans. The filing covers the fiscal year ended December 31, 2010; fourth-quarter 2010 results are included in the annual financial statements.
- Portfolio at year-end: 400 facilities in 35 states, operated by 50 third-party operators.
- Portfolio composition: 371 skilled nursing facilities, 10 assisted living facilities, five specialty facilities, mortgages on 13 facilities, and one closed facility held for sale.
- Gross real estate investments were approximately $2.5 billion; occupancy was approximately 83% for the facilities reporting occupancy.
- The CapitalSource transactions materially expanded the portfolio through three closings completed in December 2009 and June 2010.
Financial performance and key metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $258.3 million | $197.4 million | +30.8% |
| Core operating revenue | $251.0 million | $179.0 million | +40.2% |
| Rental income | $232.8 million | $164.5 million | +41.5% |
| Mortgage interest income | $10.4 million | $11.6 million | -10.4% |
| Income from continuing operations | $58.4 million | $82.1 million | -28.8% |
| Net income available to common stockholders | $49.4 million | $73.0 million | -32.4% |
| Diluted EPS | $0.52 | $0.87 | -40.2% |
| FFO available to common stockholders | $134.0 million | $117.0 million | +14.5% |
| Operating cash flow | $157.6 million | $147.2 million | +7.0% |
- Approximate operating margin before other income and expense was 57.7%, compared with 58.7% in 2009. Net income margin was approximately 22.6%, compared with 37.1% in 2009. The filing does not present a separately defined comparable GAAP operating margin.
- Depreciation and amortization increased to $84.6 million from $44.7 million, primarily because of the CapitalSource acquisitions.
- Interest expense increased to $67.3 million from $36.1 million, and refinancing costs increased to $19.5 million from $0.5 million.
- Net cash used in investing activities was $394.8 million, including $343.2 million of real estate acquisitions and $20.7 million of new mortgage loans.
- Cash and cash equivalents were $6.9 million at December 31, 2010, with restricted cash of $22.4 million. The company reported $320.0 million of undrawn revolving credit capacity.
- Total assets were $2.304 billion, stockholders’ equity was $1.004 billion, and debt was approximately $1.177 billion, representing approximately 54% of total capitalization.
- Common dividends increased from $1.20 per share in 2009 to $1.37 per share in 2010. Total common and preferred dividends paid were $138.9 million. Approximately $0.593 per common share was characterized as return of capital for tax purposes.
Material changes versus the prior comparable period
- Omega completed the remaining CapitalSource acquisitions in June 2010, acquiring 103 facilities for approximately $564 million in cash, assumed debt and equity consideration. The acquisitions added approximately $64 million of annualized lease revenue and substantially increased real estate assets.
- Revenue growth was driven principally by acquired properties and the conversion of four facilities from the mortgage portfolio to leased properties after a deed-in-lieu-of-foreclosure transaction.
- Net income and EPS declined despite higher revenue because of substantially higher depreciation, interest expense, and refinancing-related charges.
- FFO and operating cash flow increased because the acquired assets generated additional recurring cash earnings, partially offset by higher financing costs.
- Omega issued $200 million of 7.5% senior notes due 2020 and $575 million of 6.75% senior notes due 2022. It used proceeds to repay acquired debt, fund acquisitions and refinance other obligations.
- The company retired its $310 million of 7% senior notes due 2014 and repaid its $100 million GECC term loan, recording approximately $19.5 million of refinancing and debt-extinguishment costs.
- Debt increased from approximately $738 million at year-end 2009 to approximately $1.177 billion at year-end 2010, while the revolving credit balance declined to zero.
- Omega completed the transition of the final two Haven facilities to a third-party operator on June 1, 2010 and no longer operated owned facilities at year-end.
Guidance, outlook, commentary, risks and unusual items
- Management stated that cash flow from operations, available capacity under the revolving facility and expected mortgage payoffs were more than adequate for operations, debt service, dividends and anticipated needs over the following twelve months.
- Management believed operator coverage ratios were strong enough to absorb moderate Medicare and Medicaid reimbursement reductions, but warned that significant reimbursement cuts could impair operator liquidity and rent or mortgage payments.
- Key industry exposures include Medicare and Medicaid reimbursement changes, healthcare reform implementation, state budget deficits, labor costs, occupancy, quality-of-care requirements, licensing, fraud-and-abuse enforcement, litigation and operator bankruptcies.
- Florida, Ohio and Pennsylvania represented approximately 24%, 14% and 7%, respectively, of gross investments. CommuniCare and Airamid represented approximately 13% and 11% of investments; CommuniCare and Sun generated approximately 14% and 12% of 2010 revenue.
- A lawsuit concerning a right of first refusal related to four CapitalSource-acquired facilities was pending. Management considered the matter defensible, and CapitalSource agreed to indemnify Omega for related losses and reasonable legal expenses.
- In January 2011, Connecticut appointed a receiver for four Formation-affiliated skilled nursing facilities representing approximately $26 million of Omega’s net investment. Management estimated undiscounted cash flows would exceed book value, but closure or a transition to a new operator remained possible.
- The Series D preferred stock was called for redemption on March 7, 2011. Omega expected a $3.4 million write-off of preferred issuance costs, reducing first-quarter 2011 net income attributable to common stockholders by approximately $0.03 per share.
- Omega remained in compliance with its debt covenants and reported effective disclosure controls and internal control over financial reporting. Ernst & Young issued unqualified audit opinions.
Most important facts for investors to verify
- Whether acquired CapitalSource facilities achieve expected lease revenue and operator coverage levels.
- Debt maturity, refinancing and interest-rate exposure, including the approximately $1.177 billion debt balance and $320 million revolver availability.
- Operator concentration and financial condition, particularly CommuniCare, Airamid, Sun, Signature and Formation.
- Effects of Medicare and Medicaid reimbursement changes, including productivity adjustments and state-level Medicaid budget actions.
- Status and financial impact of the Connecticut receivership and the pending LCT right-of-first-refusal litigation.
- Reconciliation of GAAP net income with FFO, including the impact of unusually high refinancing costs and depreciation.
- Sustainability of common dividends, given the REIT distribution requirement, return-of-capital characterization and debt covenant limitations.
- Completion and financial effect of the Series D preferred redemption and related first-quarter 2011 accounting charge.