Business Context and Reporting Period
Omega Healthcare Investors, Inc. is a healthcare real estate investment trust focused primarily on financing and owning long-term healthcare properties, particularly skilled nursing facilities. Its portfolio uses triple-net leases and fixed-rate mortgage arrangements. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, filed November 7, 2012.
At September 30, 2012, Omega had 463 healthcare facilities in 34 states operated by 47 third-party operators, including 403 skilled nursing facilities, 14 assisted living facilities, 11 specialty facilities, mortgage investments on 32 skilled nursing facilities, and three skilled nursing facilities held for sale.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Operating revenues | $87.1 million | $72.8 million | $255.4 million | $215.9 million |
| Net income available to common stockholders | $30.1 million | $21.4 million | $86.8 million | $28.2 million |
| Diluted EPS | $0.27 | $0.21 | $0.81 | $0.28 |
| Funds from operations available to common stockholders | $56.7 million | $44.5 million | $160.7 million | $126.2 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $157.0 million | $129.0 million |
| Common dividends per share | $0.42 | $0.40 | $1.25 | $1.15 |
Q3 2012 operating income before other income and expense was $53.1 million, compared with $43.4 million in Q3 2011. Operating expenses were $34.0 million, or approximately 39.0% of operating revenue, compared with $29.4 million, or approximately 40.4%, in the prior-year quarter. Net income margin was approximately 34.6% in Q3 2012 versus 29.4% in Q3 2011. These margins are calculated from reported GAAP figures and include gains on asset sales where applicable for net income margin.
At September 30, 2012, total assets were $2.76 billion, stockholders’ equity was $1.02 billion, and total debt was approximately $1.59 billion, representing approximately 60.9% of total capitalization. Cash and cash equivalents were $7.0 million, and restricted cash was $32.9 million.
- Revolving credit facility: $102.0 million outstanding under a $475 million facility, leaving $373.0 million available; maturity is August 2015.
- Long-term borrowings included $286.0 million of secured debt and $1.30 billion of unsecured borrowings, including the $400 million of 5.875% senior notes due 2024.
- The applicable revolving-credit margin was 170 basis points over LIBOR after Fitch provided a second investment-grade rating.
- Management reported compliance with all credit facility covenants as of September 30, 2012.
Material Changes Versus the Prior Comparable Period
- Operating revenue increased 19.6% in Q3 and 18.3% for the first nine months, primarily from acquisitions, lease amendments and extensions, and additional mortgage and investment income.
- Q3 rental income increased to $78.2 million from $68.6 million, while mortgage interest income increased to $7.7 million from $3.6 million.
- Nine-month net income available to common stockholders increased substantially, partly because 2011 included a $25.0 million real estate impairment and a $4.1 million provision for uncollectible receivables. Nine-month 2012 included only $0.3 million of real estate impairment.
- Interest expense increased to $71.0 million for the first nine months from $60.2 million, reflecting higher borrowings used for acquisitions and mortgage investments.
- Q3 FFO increased 27.5%, and nine-month FFO increased 27.4%.
- Real estate investments expanded through acquisitions, including 27 Indiana facilities and a land parcel acquired August 31, 2012 for approximately $206 million in aggregate cash consideration, plus an assumed lease-related liability of approximately $13.9 million. The acquisition included 2,892 licensed beds.
- Omega issued $400 million of 5.875% senior notes due 2024 and used the proceeds in part to retire its $175 million of 7% notes due 2016 and repay revolving debt. The 2016 notes were fully retired in March 2012.
- Equity financing increased: approximately 2.6 million shares were issued under the 2012 equity shelf program for gross proceeds of approximately $63.6 million, and approximately 4.8 million shares were issued through the dividend reinvestment plan for net proceeds of approximately $106.1 million.
- Common shares outstanding increased to approximately 112.0 million at September 30, 2012 from 103.4 million at December 31, 2011.
Cash Flow, Liquidity, Outlook and Risks
For the first nine months of 2012, operating activities generated $157.0 million of cash. Investing activities used $228.2 million, primarily for property acquisitions, capital improvements and other investments. Financing activities provided $77.8 million, reflecting senior-note proceeds and equity issuance, partially offset by debt repayments and $132.7 million of dividends paid.
Management stated that cash from operations, available capacity under the revolving credit facility and expected mortgage payoffs were adequate to fund operations, debt service, dividends and investments for the next twelve months. On October 17, 2012, the board declared a quarterly dividend of $0.44 per share, a 4.8% increase from the prior quarter.
No formal earnings or FFO guidance was provided in the filing. Management stated that operator coverage ratios were believed to be adequate and that operators could absorb moderate reimbursement reductions. CMS increased fiscal 2013 skilled nursing facility payment rates by 1.8%, but potential Medicare sequestration, Medicaid reductions, reimbursement changes and regulatory developments could adversely affect operators and their ability to pay rent and interest.
- Operator and tenant concentration: CommuniCare represented approximately 11% of total investments and 13% of nine-month operating revenue; Sun Healthcare represented 10% of operating revenue.
- Healthcare reimbursement, occupancy, operator financial condition, bankruptcy risk and regulatory compliance could affect rent collections and mortgage payments.
- Interest-rate exposure exists primarily through the $102.0 million variable-rate revolving facility; the company reported no derivatives or speculative trading instruments.
- Accounts receivable increased to $119.4 million from $100.7 million at year-end, including $93.3 million of straight-line rent receivables and a $3.4 million allowance.
- Three skilled nursing facilities and one parcel of land were held for sale at September 30, 2012, with aggregate net book value of approximately $1.6 million.
- Management stated that pending litigation, individually and in the aggregate, was not expected to have a material adverse effect, but legal and regulatory uncertainty remains.
- Maintaining REIT status is material; failure to qualify could result in substantial tax liabilities and reduce cash available for distribution.
Investor Verification Priorities
- Verify the sustainability of rent collections and operator coverage, particularly for CommuniCare, Sun Healthcare and other skilled nursing operators.
- Reconcile reported FFO of $160.7 million with GAAP net income and assess the effect of acquisitions, dispositions and non-cash adjustments.
- Review debt maturities, variable-rate exposure, covenant headroom and the refinancing requirements for the 2015 revolving facility and subsequent senior-note maturities.
- Assess acquisition integration, preliminary purchase-price allocations and expected contribution from the Indiana facilities acquired in 2012.
- Monitor accounts receivable growth, straight-line rent collectability and future allowance requirements.
- Evaluate the ability to fund the $0.44 quarterly dividend while continuing acquisitions and servicing approximately $1.59 billion of debt.
- Track Medicare and Medicaid reimbursement changes, sequestration developments, state Medicaid policy and healthcare regulatory requirements.
- Confirm that no material changes have occurred in the risk factors previously disclosed, as management reported none in this quarter.