OMEGA HEALTHCARE INVESTORS INC quarterly report, Q3 FY2021

Business Context and Reporting Period

Omega Healthcare Investors, Inc. is a healthcare REIT investing primarily in skilled nursing and assisted living facilities through triple-net leases, mortgages and operator financing in the U.S. and U.K. The filing covers the quarter and nine months ended September 30, 2021; financial statements are unaudited. The portfolio included 963 healthcare facilities operated by 63 third-party operators, with approximately 98% of real estate investments related to healthcare facilities.

Key Financial Metrics

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Total revenues	$281.7 million	$119.2 million	$812.9 million	$628.6 million
Net income available to common stockholders	$138.9 million	$(91.3) million	$383.4 million	$97.9 million
Basic EPS	$0.58	$(0.40)	$1.62	$0.43
Nareit FFO	$180.7 million	$15.1 million	$531.7 million	$382.6 million
Net cash from operating activities	Not separately reported	Not separately reported	$565.6 million	$510.9 million

Q3 net income available to common stockholders included a $56.2 million gain on asset sales. Nine-month results included $160.6 million of net gains on asset sales.
Q3 total expenses were $194.2 million, compared with $212.2 million in the prior-year quarter. Nine-month expenses were $560.4 million, compared with $542.5 million.
Approximate GAAP net income margin was 49.0% in Q3 2021 and 48.0% for the first nine months, substantially influenced by asset-sale gains and other non-operating items.
Cash, cash equivalents and restricted cash totaled $106.0 million at September 30, 2021, down from $167.6 million at December 31, 2020.
Total investments were $8.63 billion, including $7.09 billion of net real estate investments, $873.7 million of net mortgage notes receivable and $434.0 million of net other investments.
Total debt was approximately $5.27 billion, representing about 55.7% of total capitalization. Senior notes and other unsecured borrowings were $4.91 billion; secured borrowings were $364.0 million. The $1.45 billion revolving credit facility had no outstanding balance at quarter end.
Total equity was $4.24 billion at September 30, 2021, compared with $4.04 billion at December 31, 2020.
The company declared quarterly common dividends of $0.67 per share and paid approximately $477.1 million of common dividends during the first nine months.

Material Changes Versus the Prior Comparable Period

Q3 revenue increased $162.5 million, primarily because 2020 included significant straight-line rent and lease-inducement write-offs associated with Agemo and Genesis, while 2021 benefited from acquisitions, facility transitions and facilities placed in service.
Nine-month revenue increased $184.3 million, supported by acquisitions and transitions, including the 24-facility Healthpeak acquisition, and higher mortgage and other investment income.
Net income and FFO improved sharply from the pandemic-affected 2020 periods, but comparisons were materially affected by prior-year operator write-offs and current-year asset-sale gains.
Net cash from operations increased $54.7 million to $565.6 million. Investing cash outflows increased to $452.2 million, primarily because of real estate acquisitions. Financing cash outflows decreased to $175.0 million, aided by approximately $272.4 million of common-stock issuance proceeds.
During the first nine months, Omega acquired facilities and related assets totaling approximately $604.0 million, sold 45 facilities for $310.8 million of net cash proceeds, and recorded $42.5 million of real estate impairments.
Debt refinancing activity included issuance of $700 million of 3.25% senior notes due 2033, repayment of the Sterling term loan and purchase of $350 million of 4.375% notes due 2023. The transactions generated a $29.7 million debt-extinguishment charge.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide formal earnings or FFO guidance. Management stated that available liquidity, operating cash flow, credit facilities, equity programs, asset sales and investment payoffs were expected to fund operations, debt service, dividends and investments for the next twelve months.
COVID-19 continued to pressure operators through staffing shortages, elevated labor and personal protective equipment costs, lower occupancy and uncertainty regarding government support. Management could not estimate the pandemic’s ultimate effect, but stated that the impact could be material.
Operators that missed payments or were placed on a cash basis represented 7.6% of nine-month 2021 revenue, excluding the impact of 2021 write-offs. The company recorded approximately $20.8 million of straight-line receivable write-offs and $16.7 million of additional Agemo loan impairment during the nine months.
Agemo failed to pay contractual rent and interest in August and September 2021 and subsequently failed to pay in October. Omega recognized $8.4 million through application of a letter of credit and security deposit, recorded an additional $16.7 million credit-loss provision on Agemo loans, and extended its forbearance and rent deferral periods through November 30, 2021.
Gulf Coast filed for Chapter 11 bankruptcy on October 14, 2021. Omega committed up to $25 million of debtor-in-possession financing, with interim court approval for up to $15.75 million. Recovery of unpaid rent, DIP financing and offset rights remains subject to bankruptcy proceedings and court approval.
Guardian failed to pay rent and mortgage interest in October 2021 on 26 operating facilities and a $112.5 million mortgage. Omega held $7.4 million of Guardian letters of credit and was negotiating a possible restructuring.
Remaining construction, capital improvement and other commitments totaled $241.1 million, excluding approximately $60.1 million of remaining commitments under other investments. The Washington, D.C. redevelopment represents a maximum funding commitment of $177.7 million and is expected to be completed in 2025.
Material legal matters include securities and derivative shareholder litigation, the Gulf Coast offset litigation and a Department of Justice investigation involving the Lakeway hospital joint venture. Management believes the pending matters will not have a material adverse effect, but certain outcomes cannot be predicted.
Other risks include operator concentration, healthcare reimbursement and regulatory changes, REIT qualification, interest rates, capital-market access, severe weather and climate-related property risks.

Most Important Facts for Investors to Verify

Whether Gulf Coast’s bankruptcy allows Omega to collect accelerated rent, recover its DIP financing and enforce contractual offset rights.
Whether Guardian and Agemo resume payments or require further lease restructurings, impairments or additional credit-loss reserves.
The sustainability of cash rents, occupancy and operator margins as COVID-19 staffing costs, vaccine mandates and government support evolve.
The composition, maturity schedule and covenant headroom of approximately $5.27 billion of debt, including the $20 million subordinated debt due in December 2021.
Whether operating cash flow and asset-sale proceeds remain sufficient to fund the $241.1 million of stated commitments, other investment commitments and the $0.67-per-share quarterly dividend.
The extent to which reported net income and FFO benefited from asset dispositions, security deposits, letters of credit and rent offsets rather than recurring contractual cash rent.