Business Context and Reporting Period
Omega Healthcare Investors, Inc. and OHI Healthcare Properties Limited Partnership filed a combined unaudited Form 10-Q for the three months ended March 31, 2018. Omega is a healthcare-focused REIT operating through its approximately 96%-owned UPREIT subsidiary. The portfolio comprised 973 healthcare facilities in 41 states and the United Kingdom, operated by 70 third-party operators, with approximately 99% of real estate investments related to long-term care facilities.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total operating revenues | $220.2 million | $231.7 million |
| Operating income before other items | $120.6 million | $139.2 million |
| Net income | $87.9 million | $109.1 million |
| Net income available to common stockholders | $84.2 million | $104.4 million |
| Basic and diluted EPS | $0.42 | $0.53 |
| NAREIT FFO | $148.0 million | $181.0 million |
| Operating cash flow | $52.9 million | $112.5 million |
| Cash, cash equivalents and restricted cash at period-end | $79.1 million | $52.5 million |
| Dividends declared per common share | $0.66 | $0.62 |
Operating margin declined to approximately 54.8% from 60.1%, while net margin declined to approximately 39.9% from 47.1%. Total assets were $8.8 billion, total equity was $3.9 billion, and debt was $4.6 billion, representing approximately 54.5% of total capitalization. Cash declined by $17.7 million from December 31, 2017.
Total secured and unsecured borrowings were $4.64 billion, including $355.0 million drawn on the revolving line of credit. The Company was in compliance with all applicable debt covenants at March 31, 2018. Management stated that available liquidity, operating cash flow, credit facilities and expected mortgage payoffs were adequate for operations, debt service, dividends and planned investments for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $11.5 million, primarily because direct financing lease income declined $15.0 million following the suspension of income recognition for Orianna. Rental income increased $1.4 million and other investment income increased $1.6 million.
- Operating expenses increased $7.0 million, driven by a $5.4 million increase in provisions for uncollectible accounts and a $4.0 million increase in general and administrative expense. These increases were partly offset by a $2.7 million decrease in real estate impairment losses.
- Interest expense increased $3.0 million because of higher debt balances and higher blended borrowing costs. Q1 2017 also included a favorable $10.4 million contractual settlement that did not recur.
- Operating cash flow fell $59.6 million, primarily because of higher contractual receivables, timing of interest payments and approximately $28.4 million paid to an operator as a lease inducement.
- FFO declined $33.0 million, or approximately 18%, reflecting operator-related issues, lower revenue and higher expenses.
- The Company acquired four facilities for approximately $30.3 million and one parcel of land for approximately $0.7 million. It sold 14 facilities for approximately $74.7 million of net proceeds and recognized a $17.5 million gain.
- Assets held for sale increased to 33 facilities with a net book value of $143.4 million, compared with 22 facilities and $86.7 million at December 31, 2017.
Guidance, Outlook, Risks and Unusual Items
- The Company continued a strategic asset-repositioning program focused on selling non-core assets and reinvesting in assets intended for long-term ownership. Management expected the program to continue through much of 2018.
- Orianna entered Chapter 11 proceedings in March 2018. The restructuring contemplated partial rent payments of $1.0 million per month, transition of 23 facilities to new operators and potential sale of the remaining 19 facilities. Omega committed up to $30 million of debtor-in-possession financing; approximately $24.5 million was outstanding at March 31, 2018.
- Omega had not recognized Orianna direct financing lease income from July 1, 2017 through March 31, 2018. Its direct financing lease investment included a $172.2 million allowance for loss, and further changes in collateral values or restructuring outcomes could materially affect results.
- Signature Healthcare was more than 90 days past due on rent at quarter-end. A May 2018 restructuring agreement provided for rent deferrals, capital funding, a working-capital loan of up to $25 million and extended lease and debt maturities.
- Subsequent to quarter-end, Omega sold 20 facilities for approximately $79 million and expected a gain of approximately $5 million. It also expected approximately $20 million of second-quarter impairment or loss-on-sale charges related to other facilities.
- The Company faced risks from operator bankruptcies, reimbursement reductions, healthcare regulation, operator concentration, interest rates, capital-market access, asset-sale execution and maintenance of REIT status. Ciena generated 10% of Q1 revenue, and Texas, Florida and Ohio represented the largest state investment concentrations.
- A purported securities class action and related shareholder demand remained pending. Management denied the allegations and stated that the outcome and potential costs could not yet be estimated.
- The Company adopted new revenue-recognition and hedging standards in 2018. Adoption was not materially adverse, but the revenue standard increased opening retained earnings by $10.0 million for a deferred gain.
Most Important Facts for Investors to Verify
- Progress and final court approval of the Orianna restructuring, DIP financing recovery and potential impairment exposure.
- Performance, rent collections and restructuring outcomes for Signature Healthcare and other financially stressed operators.
- Whether operating cash flow and recurring FFO adequately support the $0.66 quarterly dividend and required REIT distributions.
- Debt maturities, revolving-credit utilization, interest-rate sensitivity and continued covenant compliance.
- Timing, pricing and realized gains or losses on the 33 facilities classified as held for sale.
- Exposure to government reimbursement changes, operator concentration and the pending securities litigation.