Business Context and Reporting Period
Omega Healthcare Investors, Inc. is a Maryland REIT and UPREIT focused on healthcare-related real estate and financing, primarily skilled nursing facilities and assisted living facilities in the United States and United Kingdom. The company reported one segment and owned approximately 97% of Omega OP at March 31, 2021.
This unaudited Form 10-Q covers the three months ended March 31, 2021, with comparisons to the three months ended March 31, 2020. At March 31, 2021, the portfolio included 974 healthcare facilities across 42 states and the U.K., operated by 70 third-party operators.
Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenues | $273.8 million | $253.0 million | +8.2% |
| Net income | $164.4 million | $92.3 million | +78.1% |
| Net income available to common stockholders | $160.0 million | $89.9 million | +77.9% |
| Basic EPS | $0.69 | $0.40 | +$0.29 |
| Nareit FFO | $170.2 million | $181.0 million | -6.0% |
| Operating cash flow | $176.0 million | $139.1 million | +26.5% |
| Cash, cash equivalents and restricted cash | $55.9 million | $352.0 million | Down from $167.6 million at December 31, 2020 |
Rental income increased to $237.8 million from $221.5 million, while mortgage interest income increased to $23.6 million from $19.7 million. Net income margin was approximately 60.0%, compared with 36.5% in the prior-year quarter; the comparison was materially affected by gains on asset sales and other unusual items.
Total assets were $9.8 billion at March 31, 2021, including $7.2 billion of net real estate investments, $890.1 million of mortgage notes receivable and $444.7 million of other investments. Total equity was $4.1 billion.
Total secured and unsecured borrowings were $5.4 billion, compared with $5.2 billion at December 31, 2020. Debt represented approximately 56.9% of total capitalization. The company was in compliance with its debt covenants at quarter-end. Common dividends declared were $0.67 per share, and approximately $158.3 million of dividends were paid during the quarter.
Investing activities used $396.3 million of cash, principally reflecting $594.5 million of real estate acquisitions, partly offset by $188.3 million of real estate sale proceeds. Financing activities provided $108.6 million, including equity issuance proceeds, debt issuance and refinancing activity, net of debt repayments, financing costs and dividends.
Material Changes Versus the Prior Comparable Period
- Revenue increased $20.7 million, primarily from acquisitions, facilities placed in service and transitions, partly offset by operators placed on a cash basis and facility sales or transitions.
- Expenses increased $28.8 million, driven mainly by a $25.1 million increase in real estate impairments, higher interest expense and acquisition, merger and transition costs.
- The company recognized a $100.3 million net gain on asset sales, compared with a $1.8 million gain in Q1 2020.
- The company recorded a $29.7 million loss on debt extinguishment related primarily to the tender purchase of $350 million of 4.375% senior notes due 2023 and related costs.
- Nareit FFO declined despite higher reported net income, reflecting the effect of asset dispositions, impairments and other operating factors.
- Real estate acquisitions totaled approximately $594.4 million, including 24 facilities acquired from Healthpeak Properties for approximately $511.3 million and six Florida facilities for approximately $83.1 million.
- The company sold 24 facilities for approximately $188.3 million of net cash proceeds and recorded $28.7 million of impairments on four facilities. Six facilities remained classified as held for sale at quarter-end with a net book value of $7.9 million.
- The company issued $700 million of 3.25% senior notes due 2033, used proceeds to repay or reduce other borrowings and repurchase 2023 notes, and settled its sterling term loan.
- Equity issuance generated $60.1 million under the equity shelf program and $15.5 million under the dividend reinvestment and stock purchase plan.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide explicit full-year earnings or FFO guidance. Management stated that available liquidity, operating cash flow, credit facilities, equity programs, facility sales and expected investment payoffs were adequate to fund operations, debt service, dividends and investments for the next twelve months.
COVID-19 remained the principal operating risk. As of April 27, 2021, operators reported cases at 212, or 22%, of 949 operating facilities, down from 614 facilities, or 64%, in December 2020. Management attributed much of the improvement to vaccination programs but noted uncertainty regarding vaccine efficacy, participation, variants, occupancy recovery, labor costs, personal protective equipment costs and the sufficiency and timing of government support.
Management reported that it had collected substantially all contractual rents during 2020 and Q1 2021, excluding operators already subject to forbearance arrangements. However, continued occupancy pressure or operator financial distress could impair rent and interest collections, require restructurings or lead to additional impairments.
Other significant risks include government reimbursement and regulatory changes affecting operators, operator bankruptcies, concentration with major operators and states, interest-rate and capital-market conditions, REIT qualification, and the ability to sell or transition underperforming facilities.
- Remaining commitments for construction, capital improvements and other items were $141.8 million, excluding approximately $81.0 million of remaining commitments under other investments.
- Maximum funding commitments under indemnification agreements were approximately $8.1 million; management did not expect material funding.
- The company is defending securities class-action and derivative litigation related principally to disclosures concerning an operator’s financial condition and rent payments.
- A Department of Justice investigation involves alleged False Claims Act, Stark Law and Anti-Kickback Statute issues related to Lakeway Hospital. The company stated that it cannot determine whether a loss is probable.
- On April 30, 2021, after quarter-end, the company closed a new four-year $1.45 billion senior unsecured credit facility and a new four-year $50 million OP term loan facility.
Important Facts for Investors to Verify
- Whether COVID-19-related occupancy declines, operator costs and government support trends improve or deteriorate after March 31, 2021.
- Rent collection, cash-basis operators, forbearance arrangements and credit-loss assumptions, including the $66.7 million of Genesis term-loan exposure and total credit-loss allowance of $66.7 million.
- The sustainability of reported earnings and dividends after excluding the $100.3 million asset-sale gain, $29.7 million debt-extinguishment loss and other nonrecurring items.
- Progress and realized proceeds from the six facilities held for sale and the company’s ability to redeploy sale proceeds.
- Debt maturities, refinancing costs, covenant compliance, interest-rate exposure and available capacity under the post-quarter-end credit facilities.
- Exposure to major operators, including Consulate, which represented approximately 9% of Q1 2021 revenue, and geographic concentration in Florida, Texas and Michigan.
- Developments in the securities litigation, Lakeway DOJ investigation and any related financial or operational consequences.