Omega Healthcare Investors, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2012, filed August 7, 2012. Omega is a healthcare REIT focused primarily on skilled nursing facilities and other long-term-care real estate. Its portfolio consists principally of triple-net leases and fixed-rate mortgage loans.
- Portfolio: 437 healthcare facilities in 34 states operated by 47 third-party operators.
- Portfolio composition: 386 skilled nursing facilities, 10 assisted living facilities, five specialty facilities, mortgage investments on 32 skilled nursing facilities, and four facilities held for sale.
- Gross real estate investment was approximately $2.8 billion; approximately 99% related to long-term-care facilities.
- Largest operator concentration was CommuniCare at 12% of investments; Florida and Ohio represented 22% and 13% of investments, respectively.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 |
|---|---|---|---|---|
| Operating revenues | $83.8 million | $72.6 million | $168.3 million | $143.1 million |
| Income before other income and expense | $51.6 million | $38.6 million | $103.0 million | $53.3 million |
| Net income available to common stockholders | $30.6 million | $17.8 million | $56.7 million | $6.7 million |
| Diluted EPS | $0.29 | $0.17 | $0.54 | $0.07 |
| FFO available to common stockholders | $55.8 million | $42.6 million | $104.0 million | $81.7 million |
| Dividends per common share | $0.42 | $0.38 | $0.83 | $0.75 |
- Operating revenue increased 15.5% in the quarter and 17.6% year to date, primarily from 2011 acquisitions, lease amendments and extensions, new mortgage investments, and additional investment income.
- Operating expenses declined to $32.3 million in the quarter and $65.3 million year to date, mainly because the prior-year periods included a $4.1 million provision for uncollectible receivables and a $24.4 million Connecticut real estate impairment charge.
- Interest expense increased to $24.0 million in the quarter and $47.0 million year to date because of higher borrowings. Six-month results also included approximately $7.1 million of refinancing and debt redemption costs.
- Quarterly income before other income and expense represented approximately 61.5% of revenue; the comparable six-month margin was approximately 61.2%.
Cash Flow, Balance Sheet, Debt and Liquidity
- Net cash provided by operating activities was $94.4 million for the six months ended June 30, 2012, compared with $77.2 million in the prior-year period.
- Net cash used in investing activities was $17.4 million, including acquisitions, mortgage placements, capital improvements, and other investments, partially offset by $22.0 million of real estate sale proceeds.
- Net cash used in financing activities was $74.6 million, reflecting debt repayments, dividends, financing costs, and equity activity.
- Cash and cash equivalents were $2.9 million at June 30, 2012, compared with $0.4 million at December 31, 2011. Restricted cash was $36.5 million.
- Total assets were $2.55 billion and stockholders’ equity was $935.7 million at June 30, 2012.
- Debt was approximately $1.5 billion, representing approximately 61.4% of total capitalization. Debt consisted primarily of $287.3 million of secured borrowings and $1.20 billion of unsecured borrowings, net.
- The $475 million unsecured revolving credit facility had $2.0 million drawn and $473.0 million of availability at quarter-end; no letters of credit were outstanding. The facility matures August 17, 2015 and includes an accordion feature up to $600 million, subject to conditions.
- Management stated that liquidity, operating cash flow, revolving-credit availability, and expected mortgage payoffs should be adequate for operations, debt service, dividends, and planned investments for the next twelve months.
- The company was in compliance with all credit facility covenants at June 30, 2012.
Material Changes Versus the Prior Comparable Period
- Net income available to common stockholders increased from $17.8 million to $30.6 million for the quarter and from $6.7 million to $56.7 million for the six-month period.
- FFO increased 31.1% in the quarter and 27.3% year to date.
- Prior-year earnings included the $24.4 million Connecticut impairment, a $4.1 million provision for uncollectible receivables, and owned-property operating expenses; these items were substantially absent in 2012.
- Omega acquired five Indiana facilities on June 29, 2012 for approximately $25.1 million in total: four facilities for approximately $21.7 million and one facility for approximately $3.4 million.
- Omega issued $400 million of 5.875% senior notes due 2024 and used proceeds partly to retire its $175 million of 7% notes due 2016 and reduce revolving-credit borrowings.
- Four HUD mortgage notes were retired in June 2012, producing a net gain of approximately $1.7 million.
- Omega sold several facilities during the first half of 2012, recognizing aggregate gains included in the $7.3 million gain on assets sold.
- The company terminated its $140 million equity shelf program and entered into a new equity shelf program permitting up to $245 million of common-stock sales. No shares had been issued under the new program as of June 30, 2012.
- Approximately 3.2 million common shares were issued through the dividend reinvestment plan for net proceeds of approximately $69.0 million during the first six months.
Guidance, Outlook, Risks and Unusual Items
- No quantitative earnings guidance was provided in the filing.
- Management expects to continue funding acquisitions and other investments through operating cash flow, available credit, equity issuance, asset sales, and other capital sources.
- Key risks include operator financial condition, tenant and mortgage collectability, reimbursement reductions under Medicare and Medicaid, regulatory and licensing requirements, healthcare reform, quality-of-care enforcement, fraud-and-abuse rules, interest-rate changes, access to capital, credit ratings, and maintaining REIT qualification.
- Operators are exposed to significant government reimbursement risk. The filing notes the fiscal 2012 Medicare reimbursement reductions and potential future Medicare and Medicaid cost controls.
- The portfolio has operator and geographic concentration, and financial performance depends on the ability of third-party operators to meet lease and mortgage obligations.
- At June 30, 2012, accounts receivable included $86.7 million of straight-line rent receivables and $21.0 million of lease inducements, net of a $2.5 million allowance.
- Four skilled nursing facilities and one parcel of land remained held for sale with an aggregate net book value of approximately $2.1 million.
- Management stated that pending litigation, individually or collectively, was not expected to have a material adverse effect on consolidated financial position or results of operations.
- Fitch initiated investment-grade coverage in July 2012. Maintaining at least two investment-grade ratings would reduce the revolving facility pricing to a lower LIBOR-based margin range.
Important Facts for Investors to Verify
- Reconcile recurring operating performance and FFO with reported net income, excluding gains on property sales and debt-related items.
- Monitor tenant coverage, rent collections, straight-line receivables, lease inducements, and the $2.5 million allowance for potentially uncollectible amounts.
- Assess leverage, refinancing requirements, interest costs, covenant compliance, and the availability of the $473.0 million revolving-credit capacity.
- Evaluate the effect of Medicare and Medicaid reimbursement changes on operators’ ability to pay rent and mortgage interest.
- Review the performance and credit quality of CommuniCare, Sun Healthcare, and other concentrated operators.
- Track the contribution and final purchase-price allocation of the five Indiana facilities acquired on June 29, 2012.
- Consider dilution and capital-raising risk from the dividend reinvestment program and the new $245 million equity shelf program.
- Verify continued REIT qualification and the sustainability of the $0.42 quarterly common dividend.