OMEGA HEALTHCARE INVESTORS INC quarterly report, Q3 FY2018

Omega Healthcare Investors, Inc. — Q3 2018 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 invests primarily in triple-net leases, mortgage loans and other financing arrangements for skilled nursing and other long-term healthcare facilities in the United States and United Kingdom. The filing covers the unaudited three and nine months ended September 30, 2018, with comparable periods in 2017.

Portfolio: 932 healthcare facilities in 41 states and the U.K., operated by 67 third-party operators.
Approximately 99% of real estate investments relate to long-term care facilities.
Omega owned approximately 96% of Omega OP at September 30, 2018.
Common shares outstanding: approximately 200.7 million at September 30, 2018.

Financial Metrics

Metric	Q3 2018	Q3 2017	9M 2018	9M 2017
Total operating revenues	$221.9 million	$219.6 million	$661.9 million	$687.2 million
Net income	$59.1 million	$(137.5) million	$229.0 million	$39.8 million
Net income available to common stockholders	$56.6 million	$(131.7) million	$219.4 million	$38.0 million
Diluted EPS	$0.28	$(0.67)	$1.10	$0.19
NAREIT FFO	$159.4 million	$(46.8) million	$462.9 million	$285.1 million
Net cash from operating activities	Not separately provided for the quarter	Not separately provided for the quarter	$348.5 million	$427.3 million

Q3 operating expenses were $105.8 million, compared with $307.9 million in Q3 2017. The decrease primarily reflected the absence of the $194.7 million direct-financing-lease impairment recorded in Q3 2017 related to Orianna. Q3 income before other income and expense was $116.0 million, compared with a loss of $88.2 million in the prior-year quarter.

Q3 rental income declined $1.8 million year over year to $192.3 million.
Q3 mortgage interest income increased $1.5 million to $18.4 million, and other investment income increased $3.0 million to $10.3 million.
Q3 general and administrative expense increased $2.7 million to $14.2 million.
Q3 real estate impairment increased to $22.9 million from $17.8 million.
Q3 included a $2.0 million recovery related to uncollectible accounts, compared with an $11.9 million provision in Q3 2017.

Balance Sheet, Debt and Liquidity

Total assets were $8.6 billion at September 30, 2018, compared with $8.8 billion at December 31, 2017.
Total investments were $7.6 billion, including $6.2 billion of net real estate investments, $708.2 million of mortgage notes receivable and $511.7 million of other investments.
Total debt was approximately $4.6 billion, representing approximately 54.8% of total capitalization.
Debt consisted primarily of $360.0 million drawn on the revolving credit facility, $900.8 million of net term loans and $3.3 billion of senior notes and other unsecured borrowings.
Cash, cash equivalents and restricted cash were $11.1 million at September 30, 2018, down $85.7 million from December 31, 2017.
The company stated that liquidity, including operating cash flow, credit-facility availability and expected mortgage payoffs, was adequate for operations, debt service, dividends and investments for the next twelve months.
The company was in compliance with applicable debt covenants at September 30, 2018.
Quarterly common dividends were $0.66 per share. Dividends paid to common stockholders totaled $132.7 million in Q3 and $395.7 million for the first nine months.

Cash Flow and Capital Allocation

Operating cash flow declined $78.8 million year over year to $348.5 million for the first nine months, primarily because of lost Orianna direct-financing-lease income and cash payments for lease inducements.
Investing cash outflow was $150.6 million, compared with $400.0 million in the prior-year period. The change reflected lower acquisitions and higher real estate sale proceeds, partly offset by increased funding of other investments and construction.
Financing cash outflow was $283.1 million, driven principally by dividends and net debt repayments.
The company acquired seven facilities for approximately $53.1 million during 2018, acquired land for approximately $3.5 million and sold multiple facilities as part of its strategic asset-repositioning program.
Remaining commitments for construction and capital improvements totaled $255.9 million at September 30, 2018.

Material Changes and Unusual Items

During Q3, Omega transitioned 21 skilled nursing facilities and one assisted living facility from Orianna to five existing operators. The transferred properties had a net carrying value of approximately $184.5 million and expected annual contractual rent of approximately $16.8 million.
Omega provided the replacement operators with working-capital loan capacity of up to $35.7 million, capital-improvement commitments of up to $10.6 million and indemnities with maximum funding of $7.4 million.
Omega terminated its restructuring support agreement with Orianna in July 2018. Orianna remained in Chapter 11 bankruptcy and was in default under Omega’s $30 million debtor-in-possession facility. Approximately $25.0 million was outstanding under the DIP term and revolving facilities at September 30, 2018.
Omega retained a $151.7 million net investment in 16 remaining Orianna direct-financing-lease facilities, including a $76.0 million allowance, and a $36.8 million investment in four facilities under an operating lease for which no income had been recognized since July 2017.
Q3 real estate impairment totaled $22.9 million on eight facilities, primarily associated with exiting non-strategic facilities or operators. Ten facilities totaling $17.8 million were classified as held for sale at September 30, 2018.
Omega issued approximately $27.2 million of common stock under its equity shelf program and approximately $36.9 million through its dividend reinvestment and stock purchase plan during the first nine months.
Adoption of revenue-recognition and hedge-accounting standards in 2018 was not material overall, although revenue-standard adoption increased opening equity by $10.0 million.

Outlook, Risks and Contingencies

Management expected the strategic asset-repositioning program to continue through the remainder of 2018. No formal earnings or FFO guidance was provided in the filing.

Key operating risks include tenant and operator financial weakness, government reimbursement changes, occupancy levels, regulatory compliance, interest rates, capital-market access and the ability to re-lease or sell underperforming properties.
Medicare and Medicaid reimbursement reductions, value-based purchasing and the planned Patient Driven Payment Model could adversely affect operators and their ability to pay rent and interest.
Orianna’s bankruptcy, rejected or unpaid leases, collateral values and the collectability of related receivables remain significant risks. Subsequent to quarter-end, Orianna rejected the lease covering four facilities, which Omega expected to transition to other operators.
Agemo, formerly associated with Signature Healthcare, was subject to a restructuring involving rent deferrals, capital funding and additional working-capital financing. Omega’s maximum exposure to loss from Agemo was estimated at $71.4 million; Orianna’s estimated maximum exposure was $15.2 million.
The company faced a securities class action and a derivative action alleging inadequate disclosure regarding operator financial condition, rent payments and impairments. The company denied the allegations and stated that it could not predict the outcome or estimate potential costs.
Omega planned to adopt the new lease accounting standard on January 1, 2019 using a cumulative-effect transition approach and was still evaluating the impact.

Important Facts for Investors to Verify

Reconcile reported net income and FFO growth with the unusually large Orianna impairment recorded in 2017 and the absence of a comparable charge in 2018.
Assess the collectability, collateral value and restructuring outcomes for Orianna, Agemo, Genesis and other financially stressed operators.
Review the maturity and refinancing requirements for the $4.6 billion debt balance, including the $360.0 million revolving facility.
Evaluate whether operating cash flow of $348.5 million adequately covers dividends, debt service and remaining capital commitments of $255.9 million.
Monitor the $131.7 million secured loan issued on September 28, 2018, which matured in February 2019 subject to a possible 90-day extension and was expected to be satisfied through transfer of healthcare properties.
Review the potential effects of the January 1, 2019 lease-accounting adoption on reported assets, liabilities, revenue and equity.
Confirm the status and potential financial impact of the securities class action and derivative litigation.