Omega Healthcare Investors, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2019, for Omega Healthcare Investors, Inc. and its operating partnership, OHI Healthcare Properties Limited Partnership. Omega is a healthcare REIT focused primarily on skilled nursing facilities, with additional assisted living, specialty, medical office, mortgage and other healthcare-related investments in the U.S. and U.K. At quarter-end, the portfolio included 910 healthcare facilities in 41 states and the U.K., operated by 68 third-party operators; approximately 99% of real estate investments related to long-term care facilities.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total operating revenues | $223.7 million | $220.2 million |
| Operating income | $122.2 million | $138.1 million |
| Net income | $72.2 million | $87.9 million |
| Net income available to common stockholders | $69.7 million | $84.2 million |
| Diluted EPS | $0.34 | $0.42 |
| Nareit FFO | $144.1 million | $147.4 million |
| Net cash provided by operating activities | $110.1 million | $52.9 million |
- Revenue increased 1.6% year over year, while operating income declined 11.6% and net income available to common stockholders declined 17.2%.
- Operating margin was approximately 54.6%, compared with 62.7% in the prior-year quarter. Net income available to common stockholders represented approximately 31.2% of revenue, compared with 38.3% previously.
- Cash, cash equivalents and restricted cash totaled $41.4 million at March 31, 2019, compared with $11.7 million at December 31, 2018.
- Total assets were $8.5 billion and total equity was $3.8 billion. Debt was approximately $4.5 billion, or 54.0% of total capitalization. Net borrowings at March 31, 2019 were $4.429 billion, including $3.330 billion of senior notes and other unsecured borrowings, $901.3 million of term loans and $195.0 million drawn on the revolving line of credit.
- Management stated that all secured and unsecured debt covenants were satisfied at March 31, 2019.
- Omega paid approximately $136.6 million in common dividends during the quarter, including a regular dividend of $0.66 per share. Omega OP paid $7.0 million to outside unit holders.
Cash flow, liquidity and capital activity
- Operating cash flow increased $57.2 million year over year, primarily due to changes in contractual receivables, lower lease inducements and the timing of interest payments.
- Investing activities generated $72.1 million, principally reflecting approximately $86.7 million of proceeds related to the liquidation of the Orianna direct financing lease and proceeds from other investments. The company invested $30.9 million in construction in progress, $10.2 million in capital improvements and $5.9 million in real estate acquisitions.
- Financing activities used $152.6 million, including $136.6 million of common dividends and net repayments on the credit facility. The company raised $76.5 million through its equity shelf program and approximately $32.3 million through its dividend reinvestment and stock purchase plan.
- Management believes operating cash flow, available credit facilities, asset sales and expected mortgage and investment repayments are adequate to fund operations, debt service, dividends and planned investments for the next twelve months. The filing does not provide a clear unused-credit-facility amount.
Material changes and unusual items
- Operating expenses rose to $101.5 million from $99.6 million. Q1 2019 included a $7.7 million impairment on direct financing leases related to lower expected collections from the Orianna bankruptcy trust, $3.8 million of real estate tax expense and revenue recorded under the new lease standard, and $2.9 million of acquisition costs. The prior-year quarter included $4.9 million of real estate impairment and $7.8 million of provisions for uncollectible accounts.
- Orianna-related assets were substantially monetized in January 2019. The company received approximately $87 million from the distribution trust during the quarter and held an estimated remaining receivable of approximately $21.1 million at March 31, 2019. Final recoveries remain contingent on collections and wind-down costs.
- The company adopted ASC Topic 842 on January 1, 2019 without an opening equity adjustment and recorded approximately $11.1 million of initial non-cash right-of-use assets and lease liabilities.
- Omega acquired a 99-bed Ohio skilled nursing facility through a deed-in-lieu of foreclosure for approximately $11.9 million and entered a 90%-owned joint venture to construct a medical office building in Lakeway, Texas, with an estimated initial construction budget of approximately $36 million.
- Omega entered into a merger agreement to acquire MedEquities Realty Trust. Expected consideration, including assumed debt, was approximately $600 million as of March 31, 2019. The transaction remained subject to closing conditions and faced shareholder litigation.
- Remaining construction and capital-improvement commitments totaled $202.2 million at quarter-end, against total commitments of $595.2 million and amounts funded to date of $393.0 million.
Outlook, risks and contingencies
The filing does not provide formal full-year revenue, earnings or FFO guidance. Management expects continued focus on operator performance, liquidity, acquisitions, dispositions and capital funding. Daybreak remained on a cash-basis revenue model and received rent deferrals under a January 2019 amendment, including approximately $2.5 million deferred in each of the first two quarters of 2019.
- Key risks include operator financial deterioration or bankruptcy, inability to collect contractual rent and interest, reimbursement reductions under Medicare and Medicaid, changing healthcare regulation, occupancy and labor pressures, interest-rate and capital-market conditions, and the ability to re-lease or sell underperforming assets.
- CMS reimbursement and quality initiatives remain significant industry risks. The Patient Driven Payment Model was scheduled to take effect October 1, 2019, while additional skilled nursing facility staffing and inspection changes were scheduled for 2019.
- Agemo represented a reported maximum exposure to loss of approximately $85.1 million at March 31, 2019.
- Facility-transition indemnities had a maximum funding commitment of approximately $16.7 million; management did not expect a material amount to be funded.
- A securities class action was dismissed with prejudice on March 25, 2019, but plaintiffs filed an appeal in April 2019. Additional derivative actions and MedEquities merger-related lawsuits remained pending. Management believed the litigation would not materially affect consolidated financial position or results of operations.
- Management reported that disclosure controls and procedures were effective as of March 31, 2019, with no material changes in internal control over financial reporting.
Investor verification points
- Verify the final recoveries from the Orianna distribution trust and the effect of any additional impairment or allowance adjustments.
- Monitor Daybreak’s rent payments, operational improvement plan and exposure to deferred rent and straight-line receivables.
- Confirm the closing status, financing, assumed debt and post-closing effect of the MedEquities transaction.
- Review debt maturities, revolving-facility availability, interest-rate exposure and compliance with financial covenants.
- Assess operator concentration, particularly Ciena, Agemo and other operators with material revenue or investment exposure.
- Reconcile Nareit FFO to GAAP earnings and evaluate the sustainability of the $0.66 quarterly dividend against cash flow and capital commitments.