OMEGA HEALTHCARE INVESTORS INC quarterly report, Q3 FY2015

Omega Healthcare Investors, Inc. — Q3 2015 Form 10-Q Summary

Business Context and Reporting Period

Omega is a healthcare real estate investment trust focused primarily on skilled nursing facilities and other long-term-care properties. It owns or finances properties through triple-net leases, direct financing leases, mortgage loans and other investments in the United States and United Kingdom. The filing covers the three and nine months ended September 30, 2015; results are unaudited.

The April 1, 2015 Aviv REIT merger materially expanded the portfolio and converted Omega to an UPREIT structure. At September 30, 2015, Omega owned approximately 95% of Omega OP, with outside investors holding approximately 5%.

Portfolio: 947 healthcare facilities in 42 states and the United Kingdom, operated by 83 third-party operators.
Facility mix: 782 skilled nursing facilities, 85 assisted living facilities, 16 specialty facilities and one medical office building, plus mortgage and direct-financing investments.
Approximately 99% of real estate investments related to long-term-care facilities.

Key Financial Metrics

Metric	Q3 2015	Q3 2014	9M 2015	9M 2014
Total operating revenues	$202.0 million	$130.7 million	$533.1 million	$373.5 million
Net income	$83.3 million	$61.7 million	$169.8 million	$164.4 million
Net income available to common stockholders	$79.4 million	$61.7 million	$163.9 million	$164.4 million
Diluted EPS	$0.43	$0.48	$0.97	$1.30
NAREIT FFO	$147.5 million	$93.9 million	$327.9 million	$258.0 million
Operating cash flow	Not separately provided	Not separately provided	$322.8 million	$259.6 million

Q3 revenue increased approximately 54.6% year over year, while nine-month revenue increased approximately 42.7%. Q3 net income increased approximately 34.9%; nine-month net income increased approximately 3.3%. NAREIT FFO increased approximately 57.0% in Q3 and 27.1% for the nine-month period.

Operating income before other income and expense was $126.1 million in Q3 and $286.3 million for the nine-month period. Based on reported figures, operating margins were approximately 62.4% and 53.7%, respectively, compared with approximately 70.6% and 68.3% in the comparable 2014 periods. The margin decline primarily reflects higher depreciation, amortization, acquisition and merger costs following the Aviv and United Kingdom acquisitions.

Financial Position, Debt and Liquidity

Total assets were $8.6 billion at September 30, 2015, compared with $3.9 billion at December 31, 2014.
Total equity was $4.1 billion, including $365.6 million of noncontrolling interest.
Debt borrowings totaled approximately $4.2 billion, or approximately 51.1% of total capitalization, compared with approximately $2.4 billion at year-end 2014.
Cash and cash equivalents were $15.3 million; restricted cash was $23.4 million.
Net cash provided by operating activities was $322.8 million. Investing activities used $350.8 million, and financing activities provided $38.9 million.
The revolving credit facility had $550.0 million outstanding at a reported rate of 1.49%, with a $1.25 billion commitment and maturity in 2018, subject to an extension option.
Other borrowings included $500.0 million of term loans, $262.6 million of secured borrowings and $2.9 billion of unsecured borrowings, net of discounts.
Management stated that available liquidity, operating cash flow, credit-facility availability and expected mortgage payoffs were adequate for operations, debt service, dividends and planned investments for the next twelve months.
The company reported compliance with applicable affirmative, negative and financial debt covenants at September 30, 2015.

Material Changes Versus the Prior Comparable Period

The Aviv merger added 342 facilities, two direct financing leases, one medical office building and three mortgages. The merger contributed approximately $120.2 million of revenue during the first nine months and generated approximately $51.1 million of acquisition-related costs in 2015.
The United Kingdom Care Homes transaction added 23 care homes with 1,018 registered beds under a 12-year master lease. It contributed approximately $6.0 million of rental revenue during the first nine months and resulted in goodwill and a preliminary deferred tax liability.
Omega completed approximately $216.0 million of Q3 investments, including acquisitions in Florida, Virginia, Georgia, Washington and Nebraska and a $111.7 million New York City development-related property acquisition.
Real estate, direct-financing and other investments expanded substantially, while goodwill increased to $554.7 million from none at December 31, 2014, primarily due to the Aviv merger and Care Homes transaction.
Common shares outstanding increased to 184.954 million at September 30, 2015 from 127.606 million at year-end 2014, primarily reflecting merger consideration and equity issuance.
Omega issued approximately 10.925 million common shares for net proceeds of approximately $440 million and established a new $500 million equity shelf program. No shares had been issued under the new shelf program as of September 30, 2015.
Omega issued $700 million of 4.50% senior notes due 2027 and $600 million of 5.25% senior notes due 2026, redeemed the 7.50% notes due 2020 and deposited approximately $615 million with the trustee to redeem the 6.75% notes due 2022.
The quarterly common dividend increased from $0.51 per share in Q3 2014 to $0.55 per share in Q3 2015. A $0.56 per-share dividend was declared for payment in November 2015.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide formal earnings or FFO guidance. Management expressed confidence in liquidity and operator coverage, but noted that results depend on access to capital, acquisition yields, interest rates, credit ratings, operator performance and healthcare reimbursement trends.

Q3 included a $1.7 million real estate impairment and a $2.4 million loss on sales of three facilities. Nine-month impairment losses totaled $14.6 million.
Acquisition and merger-related costs totaled $55.5 million for the first nine months, versus $0.4 million in the prior-year period.
Interest expense increased to $108.8 million for the first nine months from $87.4 million, reflecting substantially higher borrowings.
Approximately $21.2 million of redemption-related costs and write-offs were expected in Q4 2015 from redemption of the 2022 notes.
Risks include government reimbursement reductions, Medicaid and Medicare policy changes, operator bankruptcies or lease rejection, regulatory and quality-of-care enforcement, occupancy and operator coverage, interest-rate and refinancing risk, capital-market availability, asset impairments and the ability to maintain REIT status.
Management reported no material change in primary market-risk exposures during the quarter. Pending litigation was not expected to have a material adverse effect, and Aviv merger-related class actions were dismissed with the appeal period expired.
Management stated that disclosure controls were effective as of September 30, 2015. Integration of Aviv’s internal controls into Omega’s financial reporting systems was still in process.

Important Facts for Investors to Verify

Reconcile post-merger revenue, FFO and operating margins on a comparable or pro forma basis, given the substantial Aviv and Care Homes contribution.
Review debt maturities, variable-rate exposure, credit-facility availability and the effect of the Q4 2015 2022-note redemption costs.
Assess operator concentration, reimbursement dependence and coverage ratios, particularly for skilled nursing facilities.
Evaluate the carrying value and impairment risk of goodwill, real estate, straight-line rent receivables and assets held for sale.
Confirm preliminary purchase-price allocations and valuation adjustments for Aviv and Care Homes, which remained subject to finalization.
Review dividend sustainability against operating cash flow, FFO, leverage and required REIT distributions.
Monitor the integration of Aviv controls and the effect of future accounting standards on presentation and consolidation.