Omega Healthcare Investors, Inc. — 2019 Q2 Form 10-Q Summary
Business Context and Reporting Period
Omega is a self-administered healthcare REIT operating through OHI Healthcare Properties Limited Partnership. The Company provides financing and capital to the long-term healthcare industry, primarily skilled nursing and assisted living facilities, through triple-net leases, mortgages and operator loans. The filing covers the quarter and six months ended June 30, 2019; results are unaudited. Omega owned approximately 97% of Omega OP at quarter-end.
At June 30, 2019, the portfolio comprised 949 healthcare facilities in 41 states and the U.K., operated by 75 third-party operators. Approximately 97% of real estate investments related to long-term care facilities.
Financial Performance and Key Metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Total operating revenues | $225.3 million | $219.9 million | $449.0 million | $440.1 million |
| Net income | $75.7 million | $82.0 million | $147.9 million | $169.9 million |
| Net income available to common stockholders | $73.1 million | $78.5 million | $142.8 million | $162.8 million |
| Diluted EPS | $0.34 | $0.39 | $0.68 | $0.82 |
| Nareit FFO | $157.2 million | $154.5 million | $301.3 million | $301.9 million |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $265.4 million | $217.2 million |
Approximate net margin declined to 33.6% in the second quarter from 37.3% in the prior-year quarter, and to 32.9% for the first six months from 38.6%. Operating margin was approximately 56.2% in the second quarter versus 60.3% in 2018, and 55.4% for the first six months versus 61.5%.
- Second-quarter revenue increased 2.5%, primarily from the MedEquities merger, acquisitions, facility transitions, lease amendments and higher mortgage and other investment income.
- Six-month revenue increased 2.0%, driven mainly by higher mortgage and other investment income.
- Second-quarter operating expenses increased $14.2 million, including $5.7 million of real estate impairment charges, $4.0 million of additional depreciation, $4.0 million of real estate tax expense following lease-accounting adoption and $1.2 million of acquisition costs.
- Six-month operating expenses increased $16.1 million, including a $7.7 million impairment related to direct financing leases, $7.9 million of real estate tax expense, $4.5 million of additional depreciation and $4.2 million of acquisition costs.
- Nareit FFO increased 1.8% in the quarter but declined 0.2% for the six-month period.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | June 30, 2019 | December 31, 2018 |
|---|---|---|
| Total assets | $9.10 billion | $8.59 billion |
| Total equity | $4.05 billion | $3.76 billion |
| Total secured and unsecured borrowings, net | $4.73 billion | $4.54 billion |
| Cash and cash equivalents | $32.8 million | $10.3 million |
| Cash, cash equivalents and restricted cash | $34.1 million | $11.7 million |
Debt represented approximately 54.1% of total capitalization at June 30, 2019. Borrowings included $500.0 million outstanding under the revolving credit facility, $898.6 million of term loans, $2.3 million of secured borrowing and $3.33 billion of senior notes and other unsecured borrowings. The Company reported compliance with applicable debt covenants.
Six-month cash flow included $265.4 million from operations, $15.0 million of net investing cash outflow and $227.8 million of net financing cash outflow. Financing outflows included $273.8 million of common dividends and $12.1 million of distributions to outside Omega OP unitholders. Management stated that available liquidity, operating cash flow, credit facilities, asset sales and expected investment payoffs should be adequate for operations, debt service, dividends and planned investments over the next twelve months.
Material Changes and Unusual Items
- MedEquities merger: Completed May 17, 2019. Omega issued approximately 7.5 million shares, paid approximately $63.7 million in cash consideration and borrowed approximately $350 million under its revolving facility. The transaction added 33 leased facilities, four mortgages, other investments and a 51% interest in the Lakeway Hospital joint venture. Merger-related revenue was approximately $7.1 million from May 17 through June 30.
- Acquisitions: First-half acquisitions totaled approximately $565.1 million, covering 28 facilities, with reported initial annual cash yields ranging from 9.35% to 12.00%.
- Operator credit and collectibility: The Company placed three operators on a cash basis in the second quarter and wrote off approximately $6.7 million of receivables and lease-related assets. Total reserves on loans were $4.9 million at June 30, 2019, compared with $108.1 million at December 31, 2018.
- Orianna bankruptcy: The Company received approximately $88 million from the bankruptcy distribution trust through June 30, 2019. The remaining receivable was approximately $19.1 million, but recovery depends on collections and wind-down costs. The Company recorded a $7.7 million allowance in the first quarter.
- Daybreak: Daybreak remained on a cash-basis revenue model. Management reduced expected near-term quarterly cash rent receipts because of occupancy, reimbursement and labor-cost pressures, while identifying potential benefits from QIPP, PDPM and Medicare rate changes beginning in the second half of 2019.
- Asset sales and impairments: Second-quarter sales generated approximately $8.6 million of net proceeds and a $0.3 million loss. The Company recorded approximately $7.6 million of impairments on two facilities, partially offset by $1.9 million of insurance proceeds. A proposed sale of ten Kentucky nursing facilities for approximately $84.5 million remained subject to regulatory and other closing conditions.
- Lease accounting: Topic 842 was adopted January 1, 2019. The filing reflects new variable lease revenue and real estate tax expense and an approximately $8.5 million equity adjustment related to collectibility assessments.
Guidance, Outlook and Risks
The filing does not provide formal earnings or FFO guidance. Management expects liquidity to support the next twelve months but notes that cash flows and capital access are sensitive to interest rates and capital-market conditions.
- The Company agreed on July 26, 2019 to purchase 60 facilities for $735 million, funded with approximately $345 million of cash and assumed HUD-insured mortgage loans of approximately $390 million. Closing remained subject to HUD consent and customary conditions.
- The proposed acquisition would add 58 SNFs and two ALFs, with approximately $64 million of expected 2020 contractual cash rent. Completion was not assured.
- Key operating risks include operator financial distress, reimbursement reductions, Medicaid and Medicare changes, PDPM implementation, labor and occupancy pressures, regulatory compliance, facility transitions and the ability to re-lease or sell underperforming assets.
- Concentration risk remains significant: Ciena generated approximately 11% of revenue, while Texas, Florida and Michigan represented approximately 12%, 9% and 7% of investments, respectively.
- The Company disclosed a Department of Justice investigation involving Lakeway Hospital and alleged False Claims Act, Stark Law and Anti-Kickback Statute issues. It cannot estimate any potential loss.
- Several shareholder and derivative lawsuits related to prior operator disclosures and the MedEquities merger remained pending or under appeal, although management believes the claims are without merit and not expected to materially affect results.
- Remaining commitments to fund construction and capital improvements were approximately $149.4 million. Indemnification commitments had a maximum potential funding amount of approximately $17.3 million, although the Company does not expect material funding.
Most Important Facts for Investors to Verify
- Whether MedEquities purchase accounting, acquired asset values and related debt assumptions are finalized without material adjustments.
- The collectibility and ultimate recovery of the Orianna trust receivable and other operator-related receivables.
- Daybreak’s cash rent performance, operator coverage and the impact of QIPP, PDPM and reimbursement changes.
- Debt levels, revolving-credit availability, refinancing requirements and covenant compliance following the merger and proposed acquisition.
- Closing status, financing impact and expected returns from the proposed $735 million acquisition of 60 facilities.
- Progress and potential exposure associated with the Lakeway DOJ investigation and outstanding shareholder and merger-related litigation.
- Future impairments, asset dispositions and the ability to maintain REIT qualification and dividend levels.