Omega Healthcare Investors, Inc. — Form 10-Q Summary
Business context and reporting period
Report for the quarter and six months ended June 30, 2010, filed August 6, 2010. Omega is a healthcare real estate investment trust focused primarily on skilled nursing facilities. Its portfolio uses triple-net leases and fixed-rate mortgage financing. At June 30, 2010, the portfolio comprised 398 healthcare facilities in 34 states, operated by 46 third-party operators, with approximately 99% of real estate investments in long-term care.
- Total gross real estate investment was approximately $2.4 billion.
- The portfolio included 370 skilled nursing facilities, 10 assisted living facilities, five specialty facilities, 10 mortgaged skilled nursing facilities and three facilities held for sale.
- Omega ceased operating facilities directly after transferring its remaining two owned-and-operated facilities to a third-party operator on June 1, 2010.
Financial performance and key metrics
| Metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Six months ended June 30, 2010 | Six months ended June 30, 2009 |
|---|---|---|---|---|
| Operating revenues | $58.8 million | $49.2 million | $117.5 million | $98.3 million |
| Net income | $15.5 million | $19.8 million | $36.5 million | $44.7 million |
| Net income available to common | $13.2 million | $17.6 million | $31.9 million | $40.2 million |
| Diluted EPS | $0.14 | $0.21 | $0.35 | $0.49 |
| FFO available to common | $29.7 million | $28.6 million | $63.1 million | $62.1 million |
| Operating cash flow | Not separately provided | Not separately provided | $65.9 million | $80.9 million |
- Operating income before other income and expense was $34.5 million for the quarter and $70.0 million for the six months. The corresponding operating margins were approximately 58.7% and 59.6%.
- Net margins were approximately 26.4% for the quarter and 31.0% for the six months, compared with approximately 40.3% and 45.5% in the prior-year periods.
- Rental income increased 25.0% for the quarter and 19.8% for the six months, principally from the CapitalSource acquisitions and the conversion of four mortgage properties to leased properties.
- Interest expense increased to $14.7 million for the quarter and $28.3 million for the six months, from $8.7 million and $17.5 million, respectively, reflecting higher borrowings.
- FFO increased modestly despite lower GAAP earnings, primarily because depreciation and amortization increased with the expanded real estate portfolio.
Balance sheet, debt and liquidity
- Total assets were $2.296 billion at June 30, 2010, compared with $1.655 billion at December 31, 2009.
- Stockholders’ equity was $961.1 million, compared with $865.2 million at year-end 2009.
- Total borrowings, net of discounts and fair-value adjustments, were $1.227 billion, compared with $738.1 million at December 31, 2009. Management described debt as approximately 56.1% of total capitalization.
- Debt consisted principally of $221.0 million under the revolving credit facility, $100.0 million of term debt, $685.0 million of senior and subordinated notes before adjustments, and $182.0 million of HUD debt.
- The new $320 million revolving credit facility had $221.0 million outstanding and $99.0 million available at June 30, 2010. It includes an accordion feature that can increase capacity to $420 million, subject to conditions.
- Cash and cash equivalents were only $2.0 million, while restricted cash was $21.7 million.
- Six-month operating cash flow of $65.9 million was more than offset by $359.9 million of investing outflows, principally $343.2 million for real estate acquisitions. Financing activities provided $293.8 million, resulting in a $0.2 million decrease in cash.
- Management stated that operating cash flow, credit facility availability and expected mortgage payoffs were adequate for operations, debt service, dividends and planned investments for the following twelve months.
- Omega was in compliance with its property-level and corporate debt covenants at June 30, 2010.
Material changes versus the prior comparable period
- CapitalSource transactions materially expanded the portfolio and balance sheet. During June 2010, Omega acquired 63 facilities for approximately $293 million in cash and 40 facilities for approximately $271 million plus transferred escrow accounts, assumed debt and approximately 995,000 common shares. The acquired portfolios represented approximately $63 million of annualized revenue.
- Real estate properties, net, increased to $2.014 billion from $1.373 billion at year-end 2009.
- Operating revenues rose $9.7 million for the quarter and $19.2 million for the six months, but net income available to common declined $4.3 million and $8.3 million, respectively, due mainly to higher depreciation, acquisition costs, interest expense and financing-cost write-offs.
- Acquisition costs were $1.2 million for the quarter and $1.4 million for the six months; the company also recorded a $3.5 million write-off of deferred financing fees associated with terminating its prior credit facility.
- Six-month operating cash flow declined $15.0 million, while investing outflows increased by $352.9 million.
- Common shares outstanding increased to 94.5 million at June 30, 2010 from 88.3 million at December 31, 2009, reflecting equity offerings, dividend reinvestment and acquisition-related issuance.
- The board subsequently declared a $0.36 common dividend per share, a 12.5% increase from the prior quarter, payable August 16, 2010. The quarterly Series D preferred dividend was $0.52344 per share.
Outlook, risks, contingencies and unusual items
- Management expects liquidity to support the next twelve months but noted sensitivity to capital-market conditions, interest rates, acquisition activity and the availability and cost of financing.
- Major risks include operator financial condition, bankruptcy and lease rejection risk, Medicare and Medicaid reimbursement changes, occupancy levels, regulatory requirements, quality-of-care initiatives, interest-rate movements and the ability to integrate the substantially larger CapitalSource portfolio.
- CommuniCare, Sun Healthcare and Advocat represented approximately 15%, 13% and 9% of second-quarter operating revenue, respectively. Florida, Ohio and Pennsylvania represented approximately 24%, 14% and 7% of real estate investments, respectively.
- The company recorded a $3.7 million settlement with a prior tenant as miscellaneous income during the first quarter. It also recognized an approximately $0.8 million gain on the sale of mortgage-backed certificates during the second quarter.
- One held-for-sale facility was impaired by approximately $0.2 million; three skilled nursing facilities remained held for sale with aggregate net book value of approximately $0.7 million.
- A lessee affiliate filed litigation alleging violations of a right of first refusal and seeking declaratory relief, specific performance and damages. Omega believes the case is defensible, and CapitalSource has agreed to indemnify Omega for related losses and legal expenses.
- The company’s non-guarantor subsidiaries held approximately $339.7 million of assets, which may affect the practical coverage of certain senior notes.
- The filing states that disclosure controls and procedures were effective as of June 30, 2010, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether acquired CapitalSource facilities achieve projected annualized revenue and whether integration costs or unforeseen liabilities reduce expected returns.
- Operator coverage ratios, rent collections and accounts receivable reserves, particularly for the largest operators and states.
- Available capacity, refinancing plans and covenant headroom for the $310 million 2014 notes and the $221 million revolving facility.
- The sustainability of dividends relative to FFO, operating cash flow and the credit agreement’s dividend limitations.
- The effect of Medicare and Medicaid reimbursement changes, including proposed 2011 Medicare payment changes and future productivity adjustments.
- The outcome and indemnification coverage of the right-of-first-refusal litigation.
- Final purchase-price allocations for the CapitalSource acquisitions, including the fair-value adjustments to assumed debt and in-place leases.