OMEGA HEALTHCARE INVESTORS INC annual report, FY2012

Omega Healthcare Investors, Inc. 2012 Form 10-K Summary

Business context and reporting period

Omega is a self-administered Maryland REIT focused primarily on acquiring, leasing and financing skilled nursing facilities and other healthcare properties in the United States. This filing covers the fiscal year ended December 31, 2012; the source does not provide a separate quarterly filing summary for fourth-quarter 2012.

At year-end, the portfolio included 478 healthcare facilities in 34 states, operated by 46 third-party operators, with approximately 53,104 operating beds.
The portfolio consisted primarily of 418 skilled nursing facilities, 16 assisted living facilities, 11 specialty facilities and mortgage investments on 31 long-term healthcare facilities.
Approximately 99% of real estate investments related to long-term care facilities. Leases were generally long-term, triple-net arrangements.

Financial performance and key metrics

Metric	2012	2011	Change
Total operating revenue	$350.5 million	$292.2 million	+20.0%
Rental income	$314.6 million	$273.5 million	+15.0%
Mortgage interest income	$30.4 million	$16.3 million	+87.2%
Income before other income and expense	$215.0 million	$137.8 million	+56.0%
Net income available to common stockholders	$120.7 million	$47.5 million	+154.3%
Diluted EPS	$1.12	$0.46	+143.5%
FFO available to common stockholders	$222.2 million	$172.5 million	+28.8%
Common dividends per share	$1.69	$1.55	+9.0%

Approximate operating margin before other income and expense was 61.3% in 2012, compared with 47.2% in 2011. Net margin was approximately 34.4%, compared with 16.2%.
Operating cash flow was $208.3 million, up from $169.8 million. Investing cash flow was an outflow of $390.7 million, primarily reflecting acquisitions and capital improvements. Financing cash flow was an inflow of $183.8 million.
Cash and cash equivalents were only $1.7 million at year-end, although restricted cash was $36.7 million and the company had $442.0 million of available capacity under its credit facilities.
Total assets were $3.0 billion and stockholders’ equity was $1.0 billion. Debt totaled approximately $1.825 billion, or approximately 64.3% of total capitalization.
Accounts receivable increased to $125.2 million from $100.7 million, primarily because of higher straight-line rent receivables. The allowance declined to $0.6 million from $1.6 million.

Material changes versus the prior comparable period

Omega completed approximately $510 million of new investments during 2012, including approximately $396.6 million of real estate acquisitions, $12.0 million of new mortgage placements and $29.4 million of capital improvements.
Fourth-quarter acquisitions totaled approximately $203.4 million and included 14 facilities in California and Arizona. The consideration included $131.5 million of cash and $71.9 million of assumed HUD debt with a blended rate of approximately 5.50%.
Omega completed approximately $227.4 million of investments in Indiana, including 31 facilities and one parcel of land, and additional investments in Michigan and Texas.
Genesis Healthcare acquired Sun Healthcare Group. Omega replaced separate Sun and Genesis leases with a 53-facility Genesis master lease expiring December 31, 2025. Genesis became Omega’s largest tenant, representing approximately 11% of gross investments.
Real estate investments increased to approximately $3.326 billion from $2.831 billion. Gross leased assets increased to $3.039 billion from $2.537 billion.
Omega issued $400 million of 5.875% senior notes due 2024 and used proceeds partly to retire its $175 million of 7% senior notes due 2016 and repay credit-facility borrowings.
The company replaced its $475 million revolving facility with $700 million of new credit facilities, consisting of a $500 million revolving facility and a $200 million deferred-draw term loan. At year-end, $258 million was outstanding.
Omega issued approximately $79.7 million of common stock through its equity shelf programs and received $111.9 million through its dividend reinvestment plan. Shares outstanding increased to 112.4 million at year-end from 103.4 million.
Impairment expense declined sharply to $0.3 million from $26.3 million, while no provision for uncollectible mortgages, notes and accounts receivable was recorded in 2012 versus $6.4 million in 2011.
2012 net income included an $11.8 million gain on the sale of nine facilities and $7.9 million of refinancing-related costs, including tender, redemption and deferred-financing-cost write-offs.

Guidance, outlook, management commentary, risks and unusual items

The filing does not provide formal earnings or acquisition guidance. Management stated that operator coverage ratios were strong and believed operators could absorb moderate Medicare and Medicaid reimbursement reductions. Management also stated that cash flow from operations, credit availability and expected mortgage payoffs were sufficient to fund operations, debt service, dividends and planned investments for at least the next twelve months.

Government reimbursement is a significant exposure. Approximately 70% of skilled nursing facility residents were reported to depend on Medicare and/or Medicaid. Medicaid rate reductions, Medicare changes, sequestration and other cost-control measures could weaken operators and reduce their ability to pay rent or debt service.
The filing discusses a scheduled 2% Medicare provider payment reduction beginning March 1, 2013, as well as reimbursement reductions under the American Taxpayer Relief Act.
Operator concentration remains material. Genesis and CommuniCare represented approximately 11% and 10% of investments, respectively; each contributed approximately 13% of 2012 revenues on the stated basis.
Geographic concentration was highest in Florida, Ohio and Indiana, representing approximately 18%, 11% and 10% of investments, respectively.
Major risks include operator bankruptcy or default, inability to re-lease facilities, healthcare regulation and licensing, litigation and professional liability, impairment of real estate, competition, capital-market access, refinancing risk, interest-rate volatility and maintenance of REIT status.
Approximately $1.789 billion of debt principal was outstanding, with $270.7 million due within three to five years and $1.501 billion due thereafter. Contractual interest payments totaled approximately $1.131 billion.
A 1% increase in interest rates was estimated to reduce the fair value of long-term borrowings by approximately $139 million.
The company held $5.9 million of liquidity deposits and $46.9 million of letters of credit from operators. It reported compliance with applicable debt covenants.
On January 16, 2013, the board declared a quarterly common dividend of $0.45 per share, an increase of $0.01 from the prior quarter.
The company reported effective disclosure controls and effective internal control over financial reporting. Ernst & Young issued unqualified audit opinions.

Most important facts for an investor to verify

Reconcile reported debt of approximately $1.825 billion with maturity schedules, secured and unsecured borrowings, and available credit capacity.
Assess whether operator coverage ratios remain adequate after Medicare, Medicaid and other reimbursement changes, including sequestration and state-level Medicaid pressure.
Review the collectability of $125.2 million of accounts receivable, particularly the $99.0 million of straight-line rent receivables.
Evaluate exposure to Genesis, CommuniCare and the largest states, as well as the effect of the Genesis-Sun lease restructuring.
Confirm the completed fair-value allocations for the 2012 acquisitions and monitor related debt fair-value amortization and potential impairment.
Review dividend sustainability against FFO, cash flow, REIT distribution requirements and debt-covenant limitations.
Verify refinancing requirements for debt maturing in 2016 and 2017 and the company’s ability to access equity and debt markets on acceptable terms.