OHI

Business Context and Reporting Period

Company: Omega Healthcare Investors, Inc. (OHI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: OHI is a Real Estate Investment Trust (REIT) focused on providing financing and capital to the long-term healthcare industry, primarily through triple-net leases and mortgage loans on skilled nursing facilities (SNFs). As of September 30, 2008, the portfolio consisted of 255 healthcare facilities in 29 states.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased by $20.8 million (53%) for the three months and $24.6 million (20%) for the nine months compared to the prior year periods. This growth was driven primarily by $19.3 million in revenue from newly owned and operated assets following the bankruptcy of tenant Haven Eldercare, LLC, and new acquisitions.
• Profitability: Net income available to common stockholders increased significantly, from $12.869 million to $25.592 million (Q3) and from $44.616 million to $54.986 million (YTD). This was aided by a $11.8 million net gain on the sale of assets in Q3.
• Expense Increases: Operating expenses rose by $20.5 million in Q3 and $28.5 million YTD, largely due to the inclusion of nursing home operating expenses ($20.8 million) for the owned and operated facilities and a $4.3 million provision for uncollectible accounts receivable related to the former Haven tenant.
• Portfolio Activity: The company acquired 16 facilities for approximately $93.2 million during the nine-month period and sold four facilities, generating a net gain of $11.9 million.

Guidance, Outlook, and Risks

Management Commentary & Outlook: Management believes liquidity is adequate to fund operations and future investments for the next twelve months. The company successfully transitioned 13 of 15 facilities previously operated by Haven to a new operator (Formation Capital) effective September 1, 2008, with two facilities pending regulatory transfer. OHI raised approximately $196 million in equity during the nine-month period (two common stock offerings) to repay debt and fund acquisitions.

Risks and Contingencies:

• Regulatory & Reimbursement: Significant risk exists regarding potential reductions in Medicare and Medicaid reimbursement rates due to state budget deficits and federal cost-cutting measures, which could impair operators' ability to pay rent.
• Owned and Operated Assets: OHI temporarily assumed operations of 15 facilities due to tenant bankruptcy. While 13 have been re-leased, the company faces operational risks, regulatory compliance issues, and potential litigation related to these facilities until fully transitioned.
• Credit Market Conditions: The company notes that severe tightening in global credit markets and economic volatility could increase borrowing costs, limit access to capital, and impact the ability to renew its $255 million credit facility maturing in March 2010.
• Concentration Risk: Approximately 24% of real estate investments are operated by two public companies (Sun Healthcare and Advocat), and 22% by one private operator (CommuniCare).

Investor Verification Checklist

• Transition of Haven Properties: Verify the status of the remaining two facilities pending regulatory transfer to the new operator and any associated costs or delays.
• Reimbursement Rate Exposure: Assess the financial health of major operators (Sun, Advocat, CommuniCare) in light of potential Medicaid/Medicare reimbursement cuts.
• Debt Maturity Wall: Review the terms and renewal prospects of the $255 million revolving credit facility maturing in March 2010 given current credit market volatility.
• Equity Dilution: Note the issuance of 11.9 million shares of common stock in 2008 and the suspension of the optional cash purchase component of the Dividend Reinvestment Plan in October 2008.
• Preferred Stock Redemption: Confirm the impact of the October 2008 purchase of 400,000 shares of Series D Preferred Stock, which is expected to generate a $2.4 million gain in Q4 2008.