OMEGA HEALTHCARE INVESTORS INC quarterly report, Q2 FY2021

Omega Healthcare Investors, Inc. — Q2 2021 Form 10-Q Summary

Business context and reporting period

Omega is a healthcare-focused REIT structured as an UPREIT. It owns and finances healthcare real estate, primarily skilled nursing facilities and assisted living facilities, through triple-net leases, mortgage loans and operator financing. The portfolio spans the United States and United Kingdom.

The filing covers the three and six months ended June 30, 2021, with comparative periods ended June 30, 2020. As of June 30, 2021, the portfolio included approximately 970 healthcare facilities, including 728 leased SNFs, 132 ALFs, 35 specialty facilities and two medical office buildings, plus mortgage and held-for-sale properties. Omega owned approximately 97% of Omega OP.

Key financial metrics

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Total revenues	$257.4 million	$256.4 million	$531.2 million	$509.4 million
Net income	$86.9 million	$102.0 million	$251.2 million	$194.2 million
Net income available to common stockholders	$84.5 million	$99.3 million	$244.5 million	$189.2 million
Basic EPS	$0.36	$0.44	$1.04	$0.83
Nareit FFO	$180.8 million	$186.5 million	$351.1 million	$367.5 million
Net cash from operating activities	Not separately reported	Not separately reported	$378.3 million	$329.4 million

Q2 net income available to common stockholders represented approximately 32.8% of revenue versus 38.7% in the prior-year quarter. Six-month net income available to common stockholders represented approximately 46.0% of revenue versus 37.1% in the prior-year period; the comparison was significantly affected by gains on asset sales in 2021.

Real estate investments, net, increased to $7.09 billion from $6.71 billion at December 31, 2020.
Total assets were $9.76 billion and total equity was $4.21 billion at June 30, 2021.
Total debt was $5.27 billion, or approximately 55.9% of total capitalization.
Cash, cash equivalents and restricted cash totaled $104.6 million, down from $167.6 million at December 31, 2020.
Mortgage notes receivable, net, were $857.2 million; other investments, net, were $458.7 million.
The allowance for credit losses was $70.3 million at June 30, 2021, including a $4.5 million reserve recorded primarily on a term loan during Q2.

Material changes versus the prior comparable period

Q2 revenue increased only $1.0 million year over year. Acquisition-related rental growth and higher mortgage and other investment income were largely offset by cash-basis accounting for troubled operators, facility sales and transitions.
Six-month revenue increased $21.8 million, primarily from acquisitions, facility transitions and higher mortgage and other investment income.
Q2 expenses increased $7.1 million to $175.1 million, driven by higher credit-loss provisions, interest expense and depreciation. Six-month expenses increased $36.0 million, primarily due to higher impairments, interest expense, depreciation and transition costs.
Q2 net income available to common stockholders declined 14.9%, while six-month net income increased 29.2%. The six-month increase primarily reflected $104.5 million of gains on asset sales versus $14.7 million in the prior-year period, partly offset by a $30.1 million debt-extinguishment loss.
Nareit FFO declined 3.0% in Q2 and 4.5% for the first six months, indicating weaker recurring operating performance despite higher reported GAAP earnings for the year-to-date period.
Omega acquired 30 facilities for approximately $594.4 million during the first six months, including 24 facilities acquired from Healthpeak with an assumed Brookdale master lease. It sold 30 facilities for approximately $201.2 million in net proceeds and recorded a $104.5 million aggregate gain.
Real estate impairments totaled $37.5 million for the first six months, including $8.8 million on three facilities in Q2. Nine facilities and one parcel of land totaling $35.3 million were held for sale at quarter-end.
Omega wrote off $17.4 million of straight-line rent receivables in Q2 and $20.1 million for the first six months after placing two operators on a cash basis because collectibility was no longer considered probable.

Cash flow, debt and liquidity

Operating cash flow increased $48.9 million year over year to $378.3 million for the first six months.
Investing activities used $387.1 million, primarily reflecting $604.9 million of real estate acquisitions, partly offset by $201.2 million of property-sale proceeds.
Financing activities used $54.3 million. Sources included $2.09 billion of long-term borrowings and $150.7 million of net common-stock issuance; major uses included $1.99 billion of debt repayments, $316.5 million of dividends and $48.1 million of financing costs.
On April 30, 2021, Omega entered into a new $1.45 billion senior unsecured multicurrency revolving facility maturing in 2025, with an accordion feature up to $2.5 billion. No revolving borrowings were outstanding at June 30, 2021.
Omega issued $700 million of 3.25% senior notes due 2033, repaid its sterling term loan, reduced borrowings under the prior revolver and repurchased $350 million of 4.375% notes due 2023.
Common dividends were $0.67 per share for each of the first two quarters. The Board declared another $0.67 per share dividend for August 2021.
Management stated that cash from operations, credit-facility availability, equity programs, property sales and expected investment payoffs were adequate to fund operations, debt service, dividends and planned investments for the next twelve months.

Guidance, outlook, commentary and risks

No formal full-year financial guidance is provided in the filing.
Management expects near-term uncertainty to persist because of COVID-19-related staffing shortages, elevated labor and PPE costs, lower occupancy, vaccination uncertainty, possible variants and uncertainty regarding government support.
Reported COVID-19 cases had declined to facilities representing 16% of operating facilities as of July 27, 2021, versus 22% in April and 64% in December 2020; the company had not independently validated operator-reported data.
Many operators began repaying accelerated Medicare payments in April 2021, which is expected to pressure their operating cash flows and could affect rent and interest payments.
Agemo received a four-month extension of rent deferrals through August 2021. The company continues to recognize Agemo rental income on a cash basis and reported maximum exposure to loss of $17.1 million for Agemo and $105.0 million for Maplewood.
Key operator and industry risks include government reimbursement reductions, Medicaid rate pressure, regulatory enforcement, operator bankruptcies, occupancy and labor trends, asset impairment, refinancing costs and interest-rate changes. Consulate generated approximately 10% of total revenue and represented more than 10% of total investments.
Omega is defending a securities class action and related derivative litigation concerning disclosures about operator financial condition, rent collections and impairments. The company also faces a Department of Justice investigation involving Lakeway Hospital and alleged False Claims Act, Stark Law and Anti-Kickback Statute issues; the filing states that a probable loss cannot presently be determined.
Remaining commitments were $124.2 million, excluding approximately $67.6 million of additional commitments under other investments. Indemnification agreements had a maximum funding commitment of approximately $8.6 million.
Subsequent to quarter-end, Omega financed or acquired additional Ohio, Maryland and U.K. facilities and entered into a $12.0 million operator working-capital facility.

Most important facts for investors to verify

Whether operator occupancy, staffing costs and government support improve sufficiently to restore rent coverage and reduce cash-basis revenue recognition.
The collectibility of receivables from the two operators placed on a cash basis, including the $17.4 million Q2 straight-line rent write-off and $3.5 million of unpaid contractual rent.
Whether Nareit FFO stabilizes, given its decline despite growth in reported GAAP net income.
The timing and pricing of the nine facilities and parcel held for sale, and the potential for further impairment charges.
Debt maturities, refinancing needs, interest-rate exposure and compliance with financial covenants.
The outcome and potential financial impact of the securities litigation and Lakeway DOJ investigation.
Omega’s ability to maintain REIT qualification while meeting its substantial dividend obligations and funding remaining investment commitments.