Omega Healthcare Investors, Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011, filed August 8, 2011. Omega is a healthcare real estate investment trust focused primarily on skilled nursing facilities and other long-term healthcare properties. Its portfolio included 400 healthcare facilities in 35 states, operated by 50 third-party operators, with approximately 99% of real estate investments related to long-term care facilities.
The portfolio consisted of 370 skilled nursing facilities, 10 assisted living facilities, five specialty facilities, mortgages on 13 skilled nursing facilities, and two facilities held for sale. Omega uses primarily triple-net leases, under which tenants generally pay property-related expenses.
Financial performance and key metrics
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Total operating revenues | $72.6 million | $58.8 million | $143.1 million | $117.5 million |
| Income before other income and expense | $38.6 million | $34.5 million | $53.3 million | $70.0 million |
| Net income | $17.8 million | $15.5 million | $11.9 million | $36.5 million |
| Net income available to common stockholders | $17.8 million | $13.2 million | $6.7 million | $31.9 million |
| Diluted EPS | $0.17 | $0.14 | $0.07 | $0.35 |
| FFO available to common stockholders | $42.6 million | $29.7 million | $56.7 million | $63.1 million |
| Cash flow from operating activities | Not separately reported | Not separately reported | $77.2 million | $65.9 million |
Calculated margins were approximately 53.1% for quarterly income before other income and expense, 24.5% for quarterly net income, and 58.6% for quarterly FFO, based on operating revenues. Six-month margins were approximately 37.3%, 8.3%, and 39.6%, respectively. These comparisons are affected by impairment, receivable provisions, depreciation, financing costs, and the preferred-stock redemption.
- Quarterly rental income increased to $68.5 million from $51.5 million, primarily due to the CapitalSource acquisitions completed in 2010.
- Quarterly mortgage interest income increased to $3.4 million from $2.5 million.
- Quarterly operating expenses rose to $34.1 million from $24.3 million, including higher depreciation and amortization, general and administrative expense, and a $4.1 million provision for uncollectible receivables.
- Six-month operating expenses included a $25.0 million real estate impairment charge, primarily related to four Connecticut skilled nursing facilities, and the $4.1 million receivable provision.
- Quarterly FFO increased 43.4% year over year, while six-month FFO declined 10.1% because of the Connecticut impairment and related items.
Balance sheet, debt, liquidity, and dividends
| Balance-sheet item | June 30, 2011 | December 31, 2010 |
|---|---|---|
| Total assets | $2.241 billion | $2.304 billion |
| Total investments | $2.062 billion | $2.124 billion |
| Total liabilities | $1.339 billion | $1.300 billion |
| Stockholders’ equity | $902.1 million | $1.004 billion |
| Debt, net | $1.228 billion | $1.177 billion |
| Cash and cash equivalents | $5.0 million | $6.9 million |
- Debt represented approximately 57.6% of total capitalization, according to management.
- Debt consisted primarily of $199.5 million of secured borrowings, $975.5 million of unsecured borrowings, and $53.0 million outstanding under the revolving credit facility.
- The $320 million revolving senior secured credit facility had $267.0 million of remaining availability and no outstanding letters of credit. Borrowings were priced at LIBOR plus 375 basis points at June 30, 2011.
- Operating cash flow increased to $77.2 million from $65.9 million for the comparable six-month period.
- Investing cash outflow was $13.3 million, versus $359.9 million in 2010, reflecting the absence of comparable CapitalSource acquisition activity.
- Financing cash outflow was $65.7 million, compared with $293.8 million of inflow in 2010. The 2011 outflow included the $108.6 million redemption of Series D preferred stock and $79.0 million of dividends paid.
- Common dividends paid were $0.75 per share for the first six months of 2011, compared with $0.64 per share in the prior-year period. On July 14, 2011, the board declared a quarterly dividend of $0.40 per share.
Management stated that cash from operations, credit-facility availability, and expected mortgage payoffs were adequate to fund operations, debt service, dividends, and planned investments for the next twelve months.
Material changes versus the prior comparable period
- Revenue growth primarily reflected the inclusion of the CapitalSource facilities acquired in 2010 and additional mortgage loans.
- Depreciation and amortization increased materially because of the CapitalSource acquisitions and related in-place lease adjustments.
- Net income available to common stockholders fell sharply for the six-month period because of the $25.0 million real estate impairment, the $4.1 million receivable provision, higher interest expense, and the $3.5 million preferred-stock issuance-cost write-off.
- Omega redeemed all outstanding Series D preferred stock on March 7, 2011, using approximately $103 million borrowed under the revolving credit facility.
- Omega issued approximately 1.4 million common shares under its equity shelf program for net proceeds of approximately $31.4 million and issued shares through its dividend reinvestment plan.
- Omega no longer operated owned facilities after June 1, 2010; therefore, the prior-year period included nursing-home revenue and expenses that were absent in 2011.
Guidance, outlook, risks, contingencies, and unusual items
- No quantitative earnings guidance was provided. Management stated that operator coverage ratios were adequate and that operators could absorb moderate Medicare and Medicaid reimbursement reductions.
- CMS announced a fiscal 2012 skilled nursing reimbursement rule that management described as producing an aggregate net Medicare reimbursement reduction of approximately 11.1%. Management expected lower operator coverage ratios but believed operators could continue meeting lease obligations.
- Omega entered into a 2011 master transition agreement to move facilities from an existing operator to a new operator. Closing was subject to healthcare regulatory approvals. The proposed transaction contemplated termination of the existing lease and a new 12-year master lease.
- As a result of the transition agreement, Omega recorded a $4.1 million provision against straight-line rent and lease inducements.
- The Connecticut receiver proceedings resulted in closure orders for four facilities and a $24.4 million impairment charge recorded in the first quarter. Omega obtained recognition as a secured lienholder with a priority claim and withdrew its appeal.
- Key risks include operator financial weakness or bankruptcy, reductions in Medicare and Medicaid reimbursement, regulatory and licensing actions, occupancy and operating performance, healthcare reform uncertainty, interest-rate volatility, access to capital, debt covenants, and maintaining REIT qualification.
- Two operators represented more than 10% of total investments: CommuniCare at 13% and Airamid at 11%. CommuniCare and Sun Healthcare generated approximately 13% and 12%, respectively, of second-quarter revenue.
- The company reported effective disclosure controls as of June 30, 2011 and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Verify the regulatory approvals and closing status of the 2011 master transition agreement and the terms of the proposed replacement lease.
- Assess the recoverability of straight-line rent, lease inducements, working-capital notes, and other operator-related receivables.
- Evaluate the effect of the fiscal 2012 Medicare reimbursement reduction and other federal and state Medicaid funding changes on operator coverage ratios and lease payments.
- Review debt maturities, interest-rate exposure on the revolving facility, covenant compliance, and the company’s ability to fund dividends and acquisitions.
- Distinguish GAAP net income from FFO and consider the effect of impairment, depreciation, preferred-stock redemption costs, and other unusual items.
- Monitor operator and geographic concentration, particularly CommuniCare, Sun Healthcare, Florida, and Ohio.
- Confirm that Omega continues to satisfy REIT income, asset, distribution, and ownership requirements.