Omega Healthcare Investors, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
Omega is a healthcare real estate investment trust focused primarily on financing and owning skilled nursing facilities through triple-net leases and fixed-rate mortgage loans. The report covers the three months ended March 31, 2012; financial statements are unaudited.
- Portfolio: 435 healthcare facilities in 33 states operated by 47 third-party operators.
- Portfolio composition: 381 skilled nursing facilities, 10 assisted living facilities, five specialty facilities, mortgage investments secured by 32 skilled nursing facilities, and seven facilities plus one parcel of land held for sale.
- Approximately 99% of real estate investments related to long-term care facilities; gross real estate investment was approximately $2.8 billion.
Financial performance and key metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenue | $84.5 million | $70.5 million | Up $14.0 million |
| Income before other income and expense | $51.5 million | $14.8 million | Up $36.7 million |
| Net income available to common stockholders | $26.1 million | $(11.1) million | Improved $37.2 million |
| Diluted EPS | $0.25 | $(0.11) | Improved $0.36 |
| Funds from operations available to common stockholders | $48.2 million | $39.1 million | Up $9.1 million |
| Cash flow from operations | $49.5 million | $38.7 million | Up $10.8 million |
- Revenue comprised rental income of $76.0 million, mortgage interest income of $7.3 million, other investment income of $1.1 million, and miscellaneous income of $0.1 million.
- Operating margin was approximately 60.9%; net margin available to common stockholders was approximately 30.9%; FFO margin was approximately 57.0%.
- Operating expenses were $33.1 million, including $27.1 million of depreciation and amortization and $0.3 million of real estate impairment.
- Interest expense was $23.0 million. Refinancing costs were $7.1 million, largely related to the tender offer and redemption of the 2016 Notes.
- Common dividends declared and paid were $0.41 per share, or approximately $42.6 million in total. On April 17, 2012, the board declared a $0.42 per-share dividend payable May 15, 2012.
- Total assets were $2.54 billion and stockholders’ equity was $882.9 million at March 31, 2012.
- Total debt was approximately $1.53 billion, representing approximately 63.4% of total capitalization. Debt fair value was approximately $1.69 billion.
- Cash and cash equivalents were $2.7 million, supplemented by $34.4 million of restricted cash.
- The $475 million unsecured revolving credit facility had $27.0 million outstanding and $448.0 million available, with no letters of credit outstanding. The facility matures in August 2015 and permits an accordion expansion to $600 million.
Material changes versus the prior comparable period
- Revenue increased 19.9%, primarily from fourth-quarter 2011 acquisitions, lease amendments and extensions, the FC/SCH operator transition, and new mortgage loans, including a $92.0 million Ciena loan and a $25.0 million White Pine loan.
- Operating expenses declined 40.7%, mainly because Q1 2011 included a $24.4 million impairment charge on four Connecticut properties. Q1 2012 included only $0.3 million of real estate impairment.
- Interest expense increased approximately $3.0 million due to higher borrowings associated with the 2011 acquisitions and mortgage investments.
- Q1 2012 included a $7.1 million charge related to the tender offer and redemption of the $175 million 7% Senior Notes due 2016. The notes were fully retired by March 27, 2012.
- Omega issued $400 million of 5.875% Senior Notes due 2024 and used the proceeds to retire the 2016 Notes and repay revolving credit borrowings. Revolver borrowings declined from $272.5 million at December 31, 2011 to $27.0 million at March 31, 2012.
- Net cash provided by investing activities changed to an inflow of $10.0 million from an outflow of $5.7 million, principally due to $14.1 million of real estate-sale proceeds and proceeds from other investments.
- Shares outstanding increased to 104.8 million from 103.4 million at year-end 2011, primarily through the dividend reinvestment plan, equity shelf program and equity compensation.
Guidance, outlook, commentary, risks and unusual items
Management stated that liquidity and available capital, including operating cash flow, revolving-facility availability and expected mortgage payoffs, should be adequate for operations, debt service, dividends and planned investments over the next twelve months. No quantitative earnings guidance was provided.
- Management believes operator coverage ratios were adequate to absorb moderate reimbursement reductions, but acknowledged that material Medicare or Medicaid cuts could impair operators’ ability to pay rent and interest.
- Healthcare reimbursement, including the fiscal 2012 Medicare SNF funding reduction, state Medicaid budgets, regulatory requirements, occupancy and operator financial condition remain significant risks.
- Additional risks include operator bankruptcies, lease rejection or mortgage modification, asset-sale execution, availability and cost of capital, credit ratings, interest-rate changes, competition, REIT qualification and changes in healthcare regulation.
- At March 31, 2012, one operator represented 12% of total investments. CommuniCare and Sun generated approximately 13% and 10%, respectively, of Q1 operating revenue. Florida and Ohio represented 22% and 13% of investments.
- Seven skilled nursing facilities and one parcel of land were held for sale at a net book value of approximately $8.1 million. Q1 included approximately $0.2 million of related impairment charges.
- Omega sold an Indiana skilled nursing facility for approximately $3.1 million and recognized a gain of approximately $0.3 million. An Alaska operator exercised a purchase option for approximately $11.0 million, producing a gain of approximately $5.1 million.
- Management reported no material adverse effect expected from pending litigation and stated that there were no material changes to previously reported risk factors. Disclosure controls were deemed effective as of March 31, 2012.
Important facts for investors to verify
- Reconcile recurring operating performance and FFO to GAAP net income, excluding the $7.1 million refinancing charge and real estate-sale gains.
- Assess debt maturity, refinancing and interest-rate exposure, particularly the variable-rate revolver and approximately $1.5 billion of total debt.
- Monitor operator concentration, payment history, straight-line rent receivables and the $1.9 million allowance for uncollectible accounts.
- Evaluate the effect of Medicare and Medicaid reimbursement changes on operator coverage ratios and rent-paying capacity.
- Track the sale of held-for-sale assets and whether proceeds approximate carrying values.
- Confirm continued compliance with revolving-credit covenants and REIT distribution and qualification requirements.