Omega Healthcare Investors, Inc. 2019 Form 10-K Summary
Business Context and Reporting Period
Omega Healthcare Investors, Inc. is a self-administered healthcare REIT structured as an UPREIT through OHI Healthcare Properties Limited Partnership. The filing covers the fiscal year ended December 31, 2019, with comparative information for 2018 and 2017. Omega invests primarily in long-term healthcare real estate, with an emphasis on skilled nursing facilities and assisted living facilities in the United States and United Kingdom. Its leases are generally long-term, triple-net leases, and it also holds fixed-rate mortgages and operator loans.
At year-end, the portfolio included 987 facilities in 40 states and the U.K., operated by 71 third-party operators. The portfolio included 784 SNFs, 114 ALFs, 28 specialty facilities, two medical office buildings, mortgage investments on 53 facilities, and six facilities held for sale.
Financial Performance and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenues | $928.8 million | $881.7 million | +5.3% |
| Net income | $351.9 million | $293.9 million | +19.8% |
| Net income available to common stockholders | $341.1 million | $281.6 million | +21.1% |
| Diluted earnings per share | $1.58 | $1.40 | +12.9% |
| Nareit FFO | $640.0 million | $587.2 million | +9.0% |
| Operating cash flow | $553.7 million | $499.4 million | +10.9% |
| Dividends per common share | $2.65 | $2.64 | +0.4% |
Rental income was $804.1 million, mortgage interest income was $76.5 million, and other investment income was $43.4 million. Operating expenses were $432.8 million, including $301.7 million of depreciation and amortization, $45.3 million of real estate impairments, and $7.9 million of direct financing lease impairments. The filing does not present a conventional operating margin; based on reported operating income of $551.7 million and operating revenues of $928.8 million, the operating margin was approximately 59.4%, substantially influenced by gains on asset sales and noncash real estate charges.
Cash, cash equivalents and restricted cash totaled $33.4 million at December 31, 2019, compared with $11.7 million at December 31, 2018. Net cash used in investing activities was $379.0 million, while net cash used in financing activities was $154.0 million.
Balance Sheet, Debt and Liquidity
- Total assets were $9.8 billion and total equity was $4.3 billion at December 31, 2019.
- Total debt was approximately $5.2 billion, representing approximately 54.5% of total capitalization.
- Debt consisted principally of $4.7 billion of unsecured borrowings, $389.7 million of secured borrowings, and term loans and revolving credit borrowings.
- The company issued $500 million of 3.625% senior notes due 2029, generating approximately $487.8 million of net proceeds.
- The company assumed approximately $389 million of HUD-insured mortgage debt in connection with the Encore portfolio acquisition. The HUD debt had a weighted-average interest rate of approximately 3.01% and an average remaining term of approximately 31 years.
- Contractual debt principal payments totaled $5.2 billion, including $963.9 million due in 2021-2023 and $1.1 billion due in 2024-2025.
- Remaining commitments for construction, capital improvements and other investments were $169.9 million.
- Management stated that liquidity, including operating cash flow, credit facility availability, equity programs, asset sales and expected investment payoffs, was adequate for operations, debt service and planned investments for the next twelve months.
- The company was in compliance with its debt covenants at year-end.
Material Changes Versus the Prior Comparable Period
- Operating revenues increased $47.1 million, primarily from the MedEquities merger, the Encore portfolio acquisition, other acquisitions, facility transitions and the adoption of lease accounting under Topic 842.
- Net income and FFO increased, although diluted shares outstanding also rose to 222.1 million from 209.7 million, reflecting equity issuance and merger-related shares.
- In May 2019, Omega completed the $661 million MedEquities merger, issuing approximately 7.5 million shares and paying approximately $63.7 million in cash consideration. The transaction added 33 leased facilities, four mortgages, other investments and a joint venture interest.
- In October 2019, Omega acquired the $757 million Encore portfolio of 60 facilities, funded with approximately $369 million of cash and assumed HUD debt of approximately $389 million.
- Total investments increased to $10.4 billion from $9.1 billion. Real estate-related assets increased to $9.8 billion from $8.6 billion.
- Omega acquired a 49% interest in a U.K. joint venture holding 67 care homes and increased investments in unconsolidated joint ventures to $199.9 million from $31.0 million.
- Omega sold 34 facilities for approximately $219.3 million of net proceeds and recognized a net gain of approximately $55.7 million, compared with 78 facilities sold and a $24.8 million gain in 2018.
- Real estate impairments increased to $45.3 million from $29.8 million, while direct financing lease impairments declined to $7.9 million from $27.2 million.
- Topic 842 was adopted on January 1, 2019. The adoption increased reported rental income and real estate tax expense and resulted in an approximately $8.5 million cumulative equity adjustment related to collectability assessments.
Outlook, Commentary, Risks and Unusual Items
Management reported that initial operator feedback on the Patient Driven Payment Model, effective October 1, 2019, was positive. Operators reported neutral to slightly positive revenue effects and rehabilitation cost savings, and management expected a modest improvement in facility-level cash flow. Occupancy and operator coverage were described as stable overall for the twelve months ended September 30, 2019, although labor costs remained elevated.
Daybreak experienced continuing liquidity and operating challenges. Omega placed Daybreak on a cash basis, recorded approximately $28.3 million of impairments on 11 facilities in the fourth quarter, sold or transitioned several facilities, and expected annual rent or rent equivalents of approximately $15 million to $20 million after restructuring. Management cautioned that the timing and ultimate benefits of the restructuring were uncertain and that further impairments could be required.
Agemo generated $65.1 million of reported revenue in 2019, compared with approximately $53.7 million of cash rental and other investment income received. If Agemo's operations deteriorate further, Omega may need to place the relationship on a cash basis and reserve approximately $71.2 million of contractual receivables, straight-line rent receivables and lease inducements.
- Government reimbursement, particularly Medicare and Medicaid, is a major risk to operators' ability to pay rent and interest. Proposed Medicaid Fiscal Accountability Rule changes could reduce operator reimbursement, particularly in Indiana and Texas.
- Florida represented approximately 15% of investments and Texas approximately 10%; Texas was identified as a challenging operating environment because of lower occupancy and low Medicaid reimbursement.
- The company had $932.5 million of borrowings indexed to LIBOR and disclosed risks associated with the transition to alternative reference rates.
- The Department of Justice is investigating alleged False Claims Act, Stark Law and Anti-Kickback Statute issues related to Lakeway Hospital, acquired through the MedEquities transaction. The company is cooperating and stated that it cannot determine whether a loss is probable.
- A securities class action was dismissed with prejudice, but plaintiffs appealed. Related derivative actions were stayed pending the appeal.
- The company disclosed a maximum funding commitment of approximately $12.8 million under indemnification agreements and $169.9 million of remaining investment commitments.
- REIT qualification requires satisfaction of complex income, asset and distribution tests. Omega paid $564.1 million of common dividends in 2019 and stated that it intends to maintain REIT qualification.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters involved acquisition accounting and collectability of future lease payments.
Most Important Facts for Investors to Verify
- Whether Daybreak's restructuring achieves the projected $15 million to $20 million of annual rent or rent equivalents and whether further impairments occur.
- Whether Agemo continues to meet contractual obligations and whether the potential $71.2 million reserve becomes necessary.
- Operator coverage, occupancy, labor costs and reimbursement trends, particularly in Texas, Florida, Indiana and other Medicaid-exposed markets.
- The maturity and refinancing plan for debt due from 2021 through 2025, including the $125 million revolving facility balance and approximately $932.5 million of LIBOR-indexed borrowings.
- The financial effect of the MedEquities and Encore acquisitions, including final purchase accounting adjustments and integration performance.
- The outcome and potential exposure from the Lakeway DOJ investigation and the pending securities litigation appeal.
- The effect of the Topic 326 expected-credit-loss standard adopted January 1, 2020 on mortgage notes, other investments and direct financing leases.
- The sustainability of dividends relative to Nareit FFO, operating cash flow, debt service and required capital commitments.