Omega Healthcare Investors, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Omega is a self-administered healthcare REIT operating through OHI Healthcare Properties Limited Partnership. The unaudited filing covers the three months ended March 31, 2020, with comparison to March 31, 2019. The portfolio primarily consists of triple-net leased skilled nursing and assisted living facilities, mortgages, and operator loans in the U.S. and U.K.
- At March 31, 2020, the portfolio included 985 healthcare facilities in 40 states and the U.K., operated by 70 third-party operators.
- Approximately 97% of real estate investments related to long-term care facilities.
- Omega owned approximately 97% of Omega OP; outside investors owned approximately 3%.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total operating revenues | $253.0 million | $223.7 million | +13.1% |
| Operating income | $147.7 million | $122.2 million | +20.9% |
| Net income | $92.3 million | $72.2 million | +27.8% |
| Net income available to common stockholders | $89.9 million | $69.7 million | +29.0% |
| Diluted EPS | $0.39 | $0.34 | +14.7% |
| Nareit FFO | $181.0 million | $144.1 million | +25.6% |
| Net cash from operating activities | $139.1 million | $110.1 million | +26.3% |
- Rental income increased to $221.5 million from $192.2 million, primarily reflecting the MedEquities merger, the Encore Portfolio acquisition, and other acquisitions and facility transitions.
- Operating margin was approximately 58.4%, compared with 54.6% in Q1 2019. Net margin available to common stockholders was approximately 35.5%, compared with 31.2%.
- Interest expense increased to $52.7 million from $48.1 million as debt balances rose following 2019 investments and assumed HUD debt.
- Operating expenses rose to $107.1 million, including $3.6 million of real estate impairments and $1.5 million of credit-loss provision. Q1 2019 included a $7.7 million direct-financing-lease impairment and $2.9 million of acquisition and merger costs.
- Other comprehensive loss was $26.6 million, mainly from foreign-currency translation and cash-flow hedge losses, reducing comprehensive income to $65.7 million.
Balance sheet, debt, liquidity, and capital allocation
- Total assets were $10.0 billion and total equity was $4.2 billion at March 31, 2020.
- Total borrowings were approximately $5.52 billion, representing approximately 56.9% of total capitalization. Debt increased from $5.14 billion at December 31, 2019, primarily due to additional revolving-credit borrowings.
- Cash, cash equivalents, and restricted cash were $352.0 million, compared with $33.4 million at year-end 2019.
- Omega drew approximately $300 million on its $1.25 billion revolving credit facility during the quarter as a precautionary measure related to COVID-19. Revolving borrowings totaled $516.8 million at quarter-end.
- Management stated that liquidity sources, including operating cash flow, credit-facility availability, equity programs, asset sales, and investment payoffs, were adequate for operations, debt service, dividends, and expected investment needs for the next 12 months.
- The company entered into $400 million of forward-starting interest-rate swaps at an average fixed rate of approximately 0.8675%, beginning August 1, 2023, to hedge anticipated long-term debt refinancing exposure.
- Quarterly dividends were maintained at $0.67 per common share. Approximately $154.6 million of common dividends and $7.3 million of distributions to outside Omega OP unit holders were paid during the quarter.
- A $200 million share-repurchase authorization was approved on March 20, 2020, but no shares had been repurchased through March 31, 2020.
- The Dividend Reinvestment and Common Stock Purchase Plan was suspended on March 23, 2020. Equity shelf and reinvestment-plan proceeds declined substantially from Q1 2019.
- Remaining commitments for construction, capital improvements, and other projects totaled $147.6 million at March 31, 2020.
Material changes versus the prior comparable period
- Revenue, operating income, net income, diluted EPS, FFO, and operating cash flow all increased, mainly because of the MedEquities merger, the Encore Portfolio acquisition, and other portfolio additions.
- Investing cash flow changed from a $72.1 million inflow in Q1 2019 to a $55.2 million outflow in Q1 2020, reflecting lower proceeds from direct-financing-lease dispositions and higher investment activity.
- Financing cash flow changed from a $152.6 million outflow to a $235.2 million inflow, primarily because of net credit-facility borrowings, including the COVID-19 precautionary draw.
- Adoption of the current expected credit-loss standard on January 1, 2020 reduced equity by $28.8 million and created initial expected-loss allowances. Total loan-related reserves rose to $35.4 million at March 31, 2020 from $5.1 million at December 31, 2019.
- Six facilities were sold for approximately $18.1 million of net proceeds and a $1.8 million gain. Three facilities were impaired by approximately $3.6 million, and eight facilities totaling $24.1 million were classified as held for sale.
- Daybreak paid no rent in Q1 2020, compared with $5.4 million of rental income in Q1 2019. Omega transitioned or planned to transition facilities to other operators and expected, subject to execution risk, annual rent or rent equivalents of $15 million to $20 million from the Daybreak portfolio after restructuring.
Outlook, management commentary, risks, and unusual items
- The filing provides no formal quantitative full-year earnings or revenue guidance.
- COVID-19 had not materially affected Q1 rental revenue, and management reported collecting substantially all contractual rents due in April. However, operators faced higher labor, personal protective equipment, and supply costs, as well as occupancy declines caused partly by reduced elective hospital procedures.
- As of April 30, 2020, operators reported 4,136 confirmed COVID-19 cases involving residents and employees across 250 facilities, or 25.9% of the 966 operating facilities. Omega had not independently validated the data and cautioned that reported cases could differ materially from actual cases.
- Management could not estimate the eventual financial impact of COVID-19. Potential effects include lower operator profitability and rent collections, restructuring or nonpayment of contractual obligations, higher credit losses, asset impairments, and constrained access to capital.
- Government support under the CARES Act, Medicaid reimbursement changes, Medicare sequestration relief, and provider-relief programs could offset some operator costs, but the amount and timing of support remained uncertain.
- Agemo represented a significant operator exposure. Omega reported a maximum exposure to loss of $120.8 million and stated that deterioration could require cash-basis rent accounting and reserves of approximately $75.9 million for related receivables, straight-line rent, and lease inducements.
- The company remained in compliance with debt covenants as of March 31, 2020.
- A Department of Justice investigation remains outstanding regarding alleged False Claims Act, Stark Law, and Anti-Kickback Statute issues involving Lakeway Regional Medical Center. The company believes its conduct was compliant but cannot determine whether a loss is probable.
- Shareholder securities and derivative litigation relating to historic operator disclosures remained subject to an appeal and related stayed proceedings; management believes the claims are without merit.
- Management stated that disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2020.
Most important facts for investors to verify
- Subsequent-quarter rent collections, deferrals, operator liquidity, and the extent of COVID-19-related nonpayment or restructuring.
- Changes in operator occupancy, infection rates, labor and PPE costs, government relief, and reimbursement levels.
- Revolving-credit availability, debt maturities, refinancing costs, covenant compliance, and liquidity after the precautionary borrowing.
- Credit-loss allowances and the collectability of mortgage notes, operator loans, Agemo-related receivables, and lease inducements.
- Execution and proceeds from Daybreak transitions, facility sales, and the eight properties held for sale.
- Potential exposure from the Lakeway DOJ investigation and related shareholder litigation.
- Whether the $0.67 quarterly dividend remains supported by recurring cash flow and post-pandemic operator performance.