Business Context and Reporting Period
Omega Healthcare Investors, Inc. is a Maryland REIT investing in healthcare real estate and providing financing to the long-term-care industry, primarily skilled nursing facilities. The unaudited Form 10-Q covers the three and six months ended June 30, 2016, with comparisons to the comparable 2015 periods.
- At June 30, 2016, the portfolio included 986 healthcare facilities in 42 states and the United Kingdom, operated by 84 third-party operators.
- Approximately 99% of real estate investments related to long-term-care facilities; the portfolio included 799 SNFs, 97 ALFs, 16 specialty facilities and one medical office building.
- Omega owned approximately 95% of Omega OP; outside investors held approximately 5%.
Financial Results and Key Metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenues | $228.8 million | $197.7 million | $441.7 million | $331.1 million |
| Net income | $113.2 million | $43.5 million | $171.4 million | $86.5 million |
| Net income available to common stockholders | $108.1 million | $41.4 million | $163.6 million | $84.5 million |
| Diluted EPS | $0.57 | $0.22 | $0.86 | $0.53 |
| NAREIT FFO | $172.3 million | $100.7 million | $325.9 million | $180.4 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $286.9 million | $193.1 million |
- Q2 operating margin before other income and expense was approximately 62.2%, compared with 37.6% in Q2 2015. The six-month margin was approximately 54.1%, compared with 48.4% in the prior-year period.
- Q2 NAREIT FFO increased approximately 71%; six-month NAREIT FFO increased approximately 81%. NAREIT FFO is a non-GAAP measure and includes amounts allocated to Omega stockholders and Omega OP unitholders.
- Dividends declared were $0.58 per common share in Q2 and $1.15 per share for the six months, compared with $0.18 and $1.07, respectively, in the prior-year periods.
- Total assets were $8.61 billion, compared with $8.02 billion at December 31, 2015. Total equity was $4.10 billion.
- Debt was approximately $4.16 billion, or 50.4% of total capitalization. Cash and cash equivalents were $33.0 million, compared with $5.4 million at year-end 2015.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected $62.9 million of six-month rental income from the Aviv Merger, $7.1 million from the Care Homes Transaction, $29.1 million from other acquisitions and lease amendments, and higher investment income.
- Q2 operating expenses declined $36.9 million year over year, primarily because 2015 included $47.1 million of acquisition and merger costs related to the Aviv Merger. This benefit was partly offset by higher depreciation and amortization.
- Six-month operating expenses increased $32.0 million because of higher depreciation and amortization, $41.5 million of real estate impairments, and higher general and administrative costs, partly offset by lower acquisition and merger costs.
- Six-month investing cash outflows increased to $709.0 million from $124.7 million, largely due to $622.8 million of real estate acquisitions and $136.5 million of investments in other investments.
- Financing provided $449.8 million of cash in the first six months, including $350 million of new long-term borrowings and net credit-facility borrowings, while dividends paid totaled $217.1 million.
- Accumulated other comprehensive loss increased to $46.5 million from $8.7 million at year-end, primarily from foreign-currency translation and cash-flow hedge losses.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that cash from operations, existing credit-facility availability and expected mortgage payoffs were adequate to fund operations, debt service, capital improvements, dividends and planned investments for the next twelve months. No quantitative earnings or FFO guidance was provided in the filing.
- Omega acquired 37 facilities in 2016 for total investment of approximately $653.3 million, including a $169.0 million related-party acquisition of 10 SNFs from Laurel Healthcare Holdings.
- The Company recorded $34.6 million of Q1 impairments and $6.9 million of Q2 impairments. In Q2, it sold 11 facilities for approximately $41.4 million of net proceeds and recognized a $13.2 million gain. Assets held for sale totaled $52.5 million at June 30.
- A $5.4 million net gain from an operator’s mortgage repayment was included in mortgage interest income. The Company also wrote off approximately $3.4 million of straight-line receivables related to a former operator.
- On July 12, 2016, Omega issued $700 million of 4.375% senior notes due 2023 and received approximately $692 million of net proceeds, used primarily to repay revolving credit borrowings and for general corporate purposes.
- On July 25, 2016, Omega purchased a $180 million secured mortgage term loan for $180 million plus a 1% prepayment fee, effectively eliminating that debt from the consolidated balance sheet.
- Key risks include operator financial performance, Medicare and Medicaid reimbursement reductions, healthcare regulation, occupancy and quality requirements, operator bankruptcies or lease rejections, interest rates, access to capital, asset-sale execution, REIT qualification and foreign-exchange exposure. The filing also identifies Brexit as a risk to the United Kingdom portfolio and broader financial markets.
- Management reported compliance with all applicable debt covenants and concluded that disclosure controls were effective as of June 30, 2016. Pending litigation was not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Reconcile reported earnings growth with the substantial contribution from acquisitions, the Aviv Merger and gains on asset sales.
- Assess operator coverage, reimbursement exposure and tenant concentration, particularly across SNF assets and government-funded payors.
- Review leverage, maturities, variable-rate debt and the post-quarter-end impact of the 2023 notes issuance and $180 million term-loan purchase.
- Evaluate the scale and valuation assumptions underlying impairments, assets held for sale and Level 3 fair-value estimates.
- Compare dividends with recurring cash generation and non-GAAP NAREIT FFO, recognizing that NAREIT FFO is not a liquidity measure.
- Monitor the related-party Laurel acquisition and the effect of United Kingdom operations, currency movements and Brexit-related uncertainty.