Omega Healthcare Investors, Inc. — 2016 Q3 Form 10-Q
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2016, filed November 8, 2016. Omega is a healthcare real estate investment trust focused primarily on skilled nursing facilities, with triple-net leases and secured mortgage investments in the United States and United Kingdom.
At September 30, 2016, the portfolio included 1,014 healthcare facilities in 42 states and the United Kingdom, operated by 81 third-party operators. Approximately 99% of real estate investments related to long-term care facilities. Omega owned approximately 96% of Omega OP.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Operating revenues | $224.6 million | $202.0 million | $666.3 million | $533.1 million |
| Net income | $82.1 million | $83.3 million | $253.5 million | $169.8 million |
| Net income available to common stockholders | $78.5 million | $79.4 million | $242.2 million | $163.9 million |
| Diluted EPS | $0.40 | $0.43 | $1.26 | $0.97 |
| NAREIT FFO | $162.6 million | $147.5 million | $488.5 million | $327.9 million |
| Cash flow from operating activities | Not separately reported | Not separately reported | $457.2 million | $322.8 million |
Q3 operating income before other income and expense was $124.3 million, representing an operating margin of approximately 55.3%. Net income available to common stockholders represented approximately 35.0% of revenue. For the nine-month period, the corresponding margins were approximately 54.5% and 36.3%.
Cash and cash equivalents were $32.6 million at September 30, 2016, compared with $5.4 million at December 31, 2015. Net cash used in investing activities was $1.135 billion, primarily reflecting $959.7 million of real estate acquisitions and $243.0 million of investments in other investments. Net cash provided by financing activities was $704.7 million.
Total debt was approximately $4.4 billion, equal to approximately 51.5% of total capitalization. Total liabilities were $4.807 billion, total equity was $4.175 billion, and total assets were $8.982 billion. The company reported compliance with all debt covenants.
Common dividends declared were $0.60 per share for the third quarter and $1.75 per share for the nine-month period. The board subsequently declared a $0.61 per-share dividend payable in November 2016.
Material changes versus prior comparable period
- Q3 revenue increased $22.7 million, or approximately 11%, primarily from acquisitions, lease amendments and increased other investment income.
- Nine-month revenue increased $133.2 million, or approximately 25%, driven by the Aviv merger, the Care Homes transaction, other acquisitions and higher investment income.
- Q3 net income available to common stockholders declined modestly despite higher revenue, primarily because operating expenses increased $24.4 million and interest expense increased $4.7 million.
- Nine-month net income available to common stockholders increased approximately 48%; however, acquisition and merger costs fell by $45.9 million compared with 2015, while depreciation, amortization and impairment charges increased materially.
- NAREIT FFO increased approximately 10% in Q3 and 49% for the nine-month period.
- Operating cash flow increased $134.4 million, or approximately 42%, to $457.2 million for the nine-month period.
- Debt increased from $3.569 billion at year-end 2015 to approximately $4.434 billion at September 30, 2016. The company issued $700 million of 4.375% senior notes due 2023, added a $350 million term loan facility, and eliminated a $180 million mortgage term loan through purchase of the debt.
Guidance, outlook, risks and unusual items
The filing does not provide formal full-year earnings or FFO guidance. Management stated that available liquidity, operating cash flow, credit facilities and expected mortgage payoffs were adequate to fund operations, debt service, dividends and investments for the next twelve months.
- The company recorded $58.7 million of real estate impairment losses for the nine-month period, including $17.3 million in Q3. The impairments primarily reflected plans to exit non-strategic facilities and operators, particularly assets acquired in the Aviv merger.
- Omega sold six facilities in Q3 for approximately $21.0 million of net proceeds and recognized a $5.1 million gain. Assets held for sale totaled $91.2 million, representing 31 properties, at September 30, 2016.
- 2016 acquisitions totaled approximately $1.023 billion, covering 70 skilled nursing facilities and 20 assisted living facilities, with stated initial cash yields generally between 6.8% and 9.0%. Certain acquisition valuations remained subject to adjustment.
- Operator performance depends substantially on Medicare and Medicaid reimbursement, occupancy, regulatory compliance and access to capital. Reimbursement reductions, payment reforms, changes in quality-based programs and operator distress could impair rent and interest collections.
- New CMS requirements for skilled nursing facilities became effective beginning November 28, 2016, with additional implementation phases in 2017 and 2019. Management noted potential compliance and operating costs for operators.
- Interest-rate and capital-market conditions may affect borrowing costs, debt refinancing, acquisition activity and asset values. Foreign currency translation and cash-flow hedges produced a $45.5 million nine-month other comprehensive loss.
- The company is exposed to bankruptcy, lease rejection, foreclosure, litigation, healthcare fraud and abuse, privacy, licensing and quality-of-care risks. Management stated that pending legal proceedings were not expected to have a material adverse effect.
- Management believes the company continues to qualify as a REIT, but failure to maintain REIT status could materially increase taxes and adversely affect results.
Most important facts for investors to verify
- Reconcile reported net income with NAREIT FFO and assess the effect of impairments, asset-sale gains, depreciation and other non-cash items.
- Review operator concentration, coverage ratios, reimbursement exposure and the collectability of straight-line rent and other receivables.
- Evaluate the sustainability of the dividend against operating cash flow, debt service and the REIT distribution requirement.
- Examine debt maturities, variable-rate exposure, covenant headroom and the approximately $865 million increase in debt from year-end 2015.
- Assess whether assets held for sale and the $58.7 million of impairment charges indicate continuing portfolio or operator credit deterioration.
- Verify the final fair values and contingent or deferred consideration associated with 2016 acquisitions, including the purchase option obligation and remaining acquisition payments.
- Monitor the financial and regulatory impact of CMS rule changes and potential Medicare and Medicaid reimbursement reductions on tenants and operators.