OHI

Business Context and Reporting Period

Company: Omega Healthcare Investors, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Omega is a Real Estate Investment Trust (REIT) focused on providing financing and capital to the long-term healthcare industry, primarily through triple-net leases on skilled nursing facilities (SNFs) and fixed-rate mortgage loans. As of June 30, 2009, the portfolio consisted of 255 healthcare facilities in 28 states. The company temporarily assumed operating responsibility for two facilities following a tenant bankruptcy, with the remainder of the portfolio leased to third-party operators.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased by $13.7 million (16.2%) year-over-year. This was driven primarily by $8.8 million in nursing home revenues from two owned-and-operated facilities (previously operated by a bankrupt tenant) and additional rental/mortgage income from acquisitions made in 2008.
• Expense Increases: Operating expenses rose by $8.1 million, largely due to $10.9 million in nursing home operating expenses for the owned facilities and increased depreciation from new acquisitions. These were partially offset by a $4.3 million decrease in the provision for uncollectible accounts receivable compared to 2008.
• Profitability: Net income increased by $10.3 million. A significant contributor was a $4.5 million net gain from a litigation settlement received in the first quarter of 2009, compared to no such gain in the prior year period.
• Debt Restructuring: On June 30, 2009, the company replaced its $255 million credit facility with a new $200 million revolving senior secured credit facility. This resulted in a one-time non-cash charge of approximately $0.5 million for the write-off of unamortized deferred financing costs.

Guidance, Outlook, and Risks

Management Commentary: Management believes liquidity is adequate to fund operations and debt service for the next twelve months, citing cash flows from operations and $154 million in availability under the new credit facility. The company expects to resume acquisition activity as capital markets stabilize.

Risks and Contingencies:

• Reimbursement Risk: Significant uncertainty exists regarding federal and state reimbursement rates for Medicare and Medicaid. The CMS final rule for fiscal year 2010 includes a net decrease in aggregate Medicare payments to SNFs of approximately 1.1%, which could impact operator ability to pay rent.
• Operator Concentration: Approximately 24% of real estate investments are operated by two public companies (Sun Healthcare and Advocat), and 31% by two private companies (CommuniCare and Signature). Financial distress at these operators poses a concentration risk.
• Regulatory Environment: Ongoing healthcare reform legislation and quality of care initiatives (e.g., CMS Special Focus Facility program) could adversely affect operator financial conditions.

Investor Verification Checklist

• Owned-and-Operated Transition: Verify the timeline and regulatory approval status for transitioning the two remaining owned-and-operated facilities to the new operator (Formation/Genesis), as these currently generate operating losses.
• Reimbursement Impact: Assess the specific impact of the CMS fiscal year 2010 payment reduction on the company's top operators, particularly those with high Medicaid exposure.
• Debt Covenants: Confirm continued compliance with the financial covenants of the new $200 million credit facility, specifically the maximum leverage ratio and minimum fixed charge coverage ratio.
• Litigation Settlement: Note that the $4.5 million gain from the 1999 lawsuit settlement was a non-recurring item; exclude this when projecting future earnings.
• Equity Shelf Program: Monitor the utilization of the $100 million Equity Shelf Program for potential dilution or capital raising activities.