Omega Healthcare Investors, Inc. — Q1 2011 Form 10-Q Summary
Business context and reporting period
Omega is a healthcare real estate investment trust focused on financing and owning long-term healthcare properties, principally skilled nursing facilities. Its portfolio consists primarily of triple-net leases and fixed-rate mortgage loans. The filing covers the three months ended March 31, 2011, with comparative results for the three months ended March 31, 2010; balance sheet comparisons are to December 31, 2010.
- Portfolio: 400 healthcare facilities and mortgage investments in 35 states, operated by 50 third-party operators.
- Facility mix: 370 skilled nursing facilities, 10 assisted living facilities, five specialty facilities, 13 mortgaged skilled nursing facilities and two facilities held for sale.
- Approximately 99% of real estate investments related to long-term care facilities.
- Common shares outstanding were 101.614 million as of May 2, 2011.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|
| Total operating revenues | $70.5 million | $58.7 million | +$11.8 million |
| Income before other income and expense | $14.8 million | $35.5 million | -$20.7 million |
| Net income | $(5.9) million | $21.0 million | -$26.9 million |
| Net income available to common stockholders | $(11.1) million | $18.7 million | -$29.8 million |
| Diluted EPS | $(0.11) | $0.21 | Down $0.32 |
| Funds from operations available to common stockholders | $14.1 million | $33.4 million | -$19.2 million |
| Net cash provided by operating activities | $38.7 million | $38.8 million | -$0.1 million |
- Revenue growth was driven primarily by the 2009 and 2010 CapitalSource acquisitions, which increased rental income by approximately $19.1 million, and by higher mortgage interest income.
- Operating expenses increased to $55.7 million from $23.2 million, principally because of $25.0 million of real estate impairment charges, higher depreciation and amortization, and higher general and administrative expense.
- Approximate operating margin was 21.0% in Q1 2011 versus 60.5% in Q1 2010. Net margin was negative 8.4%, compared with 35.7% in the prior-year quarter.
- Common dividends declared and paid were $0.37 per share, compared with $0.32 per share in Q1 2010. On April 14, 2011, the board declared a $0.38 per share quarterly dividend.
Balance sheet, debt and liquidity
| Metric | March 31, 2011 | December 31, 2010 |
|---|
| Total assets | $2.258 billion | $2.304 billion |
| Stockholders’ equity | $895.2 million | $1.004 billion |
| Total debt, net | $1.245 billion | $1.177 billion |
| Cash and cash equivalents | $3.4 million | $6.9 million |
| Restricted cash | $20.2 million | $22.4 million |
| Revolving credit facility outstanding | $69.0 million | — |
| Revolving facility availability | $251.0 million | Not stated |
- Debt represented approximately 58.2% of total capitalization at March 31, 2011.
- The $320 million revolving senior secured credit facility matures in 2014 and carried pricing of LIBOR plus 3.75% at quarter-end. It had no outstanding letters of credit.
- Long-term debt included $950 million of senior notes, approximately $200.4 million of HUD-related secured borrowings and approximately $21.4 million of subordinated debt.
- Operating cash flow of $38.7 million substantially covered the $40.3 million of dividends paid during the quarter, before investing and other financing requirements.
- Net cash used in investing activities was $5.7 million. Net cash used in financing activities was $36.6 million, primarily reflecting the preferred stock redemption and dividend payments.
- Management stated that cash from operations, revolver availability and expected mortgage payoffs were adequate to fund operations, debt service, dividends and planned investments over the next twelve months.
Material changes versus the prior comparable period
- Revenue increased 20.1%, but net income available to common stockholders declined from $18.7 million to a loss of $11.1 million.
- The quarter included a $24.4 million impairment charge on four Connecticut skilled nursing facilities and an approximately $0.6 million impairment charge on an Oklahoma property held for sale.
- Interest expense rose to $20.0 million from $13.6 million because of higher borrowings associated with the CapitalSource acquisitions.
- The Series D preferred stock was fully redeemed on March 7, 2011 for an aggregate redemption price of approximately $108.6 million. The redemption was funded partly with approximately $103 million of revolver borrowings, and the company wrote off $3.4 million of preferred issuance costs.
- Approximately 1.3 million common shares were issued through the equity shelf program for $28.1 million of net proceeds. Dividend reinvestment generated an additional $17.5 million.
- Owned and operated facilities no longer generated nursing home revenue in Q1 2011; the comparable 2010 period included $4.4 million of such revenue and $4.6 million of related expenses.
- Accounts receivable increased to $96.0 million from $92.8 million, while the allowance increased to $6.4 million from $4.0 million.
Outlook, commentary, risks and unusual items
- Four Connecticut facilities, containing approximately 472 licensed beds, were placed under a court-appointed receiver. The court ordered closure of the facilities on April 27, 2011; Omega intended to appeal, and the order was stayed during the applicable appeal period and pending appeal unless the stay was lifted.
- Management believed operator coverage ratios were generally strong enough to absorb moderate Medicare and Medicaid reimbursement reductions, but warned that significant reimbursement cuts could impair operators’ ability to pay rent and mortgage obligations.
- A CMS proposal discussed in the filing contemplated either an estimated 11.3% reduction in total Medicare reimbursement or a net 1.5% rate increase for skilled nursing facilities for fiscal 2012. Management expected either parity adjustment to reduce operator coverage ratios, but did not believe either option would have a material effect on Omega’s portfolio.
- Key risks include government reimbursement reductions, operator financial distress or bankruptcy, regulatory and licensing actions, facility closures, interest-rate increases, capital-market access, refinancing risk, asset sales below carrying value and maintenance of REIT qualification.
- The company reported no material change to previously disclosed risk factors other than risks related to potential reimbursement reductions and government budget deficits.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. A Texas lawsuit related to four facilities was dismissed with prejudice on April 19, 2011.
- The company’s disclosure controls and procedures were deemed effective as of March 31, 2011, with no reported material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether the Connecticut facility closures and appeal materially affect rent collections, property values, impairment charges or re-leasing prospects.
- The status and financial condition of major operators, particularly CommuniCare and Airamid, which represented 13% and 11% of investments, respectively; CommuniCare and Sun Healthcare generated approximately 14% and 12% of Q1 operating revenue.
- The effect of Medicare and Medicaid reimbursement changes, including the eventual CMS skilled nursing facility payment rule.
- Whether operating cash flow can consistently support the common dividend after debt service, capital investments and required distributions.
- Leverage, revolver utilization, refinancing needs and exposure to higher rates on the $69 million of variable-rate revolver borrowings.
- The sustainability of FFO, which declined to $14.1 million from $33.4 million despite higher revenue.
- Potential additional impairment or collection reserves relating to operator distress, property closures and the company’s $96.0 million of accounts receivable.
