Omega Healthcare Investors, Inc. — 2015 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three months ended March 31, 2015, filed May 8, 2015. Omega is a healthcare real estate investment trust focused primarily on skilled nursing facilities and other long-term-care properties. Its portfolio comprised 569 healthcare facilities in 38 states, operated by 50 third-party operators, with approximately 99% of real estate investments related to long-term-care facilities.
The quarter does not include Aviv REIT’s operations. Omega completed the Aviv merger on April 1, 2015 and converted to an UPREIT structure before closing.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total operating revenues | $133.4 million | $121.0 million | +$12.4 million |
| Income before other income and expense | $85.9 million | $83.0 million | +$3.0 million |
| Net income available to common stockholders | $43.1 million | $55.8 million | -$12.8 million |
| Diluted EPS | $0.32 | $0.45 | -$0.13 |
| Funds from operations available to common stockholders | $79.6 million | $84.4 million | -$4.7 million |
| Cash flow from operations | $103.3 million | $78.1 million | +$25.2 million |
| Capital expenditures and investing cash outflow | $18.5 million outflow | $120.4 million outflow | $101.9 million lower outflow |
Calculated operating margin was approximately 64.4%, compared with 68.6% in the prior-year quarter. Net margin was approximately 32.3%, compared with 46.1%, primarily reflecting refinancing costs, impairment charges and the absence of the prior-year asset-sale gain.
- Rental income increased to $101.0 million from $95.9 million.
- Mortgage interest income increased to $16.6 million from $9.3 million, primarily reflecting new mortgage investments completed in 2014.
- Operating expenses increased to $47.5 million from $38.0 million, including $6.0 million of real estate impairment charges and $4.9 million of acquisition costs.
- Interest expense was $32.4 million, compared with $27.1 million.
- Net refinancing costs were $9.4 million, including costs related to redeeming the 7.5% 2020 Notes.
- Dividends declared were $0.89 per common share; $68.3 million of dividends were paid during the quarter.
Balance sheet, debt and liquidity
| Balance-sheet item | March 31, 2015 | December 31, 2014 |
|---|---|---|
| Total assets | $4.598 billion | $3.922 billion |
| Cash and cash equivalents | $700.1 million | $4.5 million |
| Total investments | $3.638 billion | $3.651 billion |
| Total liabilities | $2.827 billion | $2.520 billion |
| Stockholders’ equity | $1.771 billion | $1.401 billion |
| Total debt, net | $2.627 billion | $2.379 billion |
Debt represented approximately 59.7% of total capitalization. The company had no revolving credit borrowings at March 31, 2015 and had $200 million outstanding under its term loan. It was in compliance with applicable debt covenants.
Operating cash flow was the primary liquidity source. Management stated that cash, operating cash flow, available credit facilities and expected mortgage payoffs were adequate for recurring expenses, debt service, dividends and planned investments for the following 12 months.
Material changes versus the prior comparable period
- Revenue increased 10.3%, driven by acquisitions and lease amendments and by higher mortgage interest income.
- Net income declined 22.9% and diluted EPS declined 28.9%, despite higher revenue, due to refinancing costs, impairment charges, higher interest expense and the prior-year gain on asset sales.
- FFO declined 5.6%, largely because of refinancing-related costs and other unusual items.
- Operating cash flow increased 32.3%, while investing cash outflows decreased substantially because Q1 2014 included significantly larger mortgage placements.
- Omega issued 10.925 million common shares for approximately $440 million of net proceeds.
- Omega issued $700 million of 4.50% senior notes due 2027 and redeemed all $200 million of 7.50% senior notes due 2020.
- Omega paid approximately $154.3 million to retire 21 HUD-guaranteed mortgage loans with approximately $146.9 million of principal outstanding.
Guidance, outlook, risks and unusual items
- No specific full-year earnings or FFO guidance was provided in the filing.
- Management expected higher general and administrative and stock-based compensation expense following the Aviv merger and other acquisitions.
- On April 1, 2015, Omega completed the Aviv merger, issuing approximately 43.7 million Omega shares and acquiring 348 properties in 30 states operated by 37 third-party operators.
- On April 1, 2015, Omega increased its revolving credit facility to $1.25 billion and added a $200 million acquisition term loan facility. Omega OP also entered into a $100 million term loan facility.
- On May 1, 2015, Omega closed a $179 million purchase/leaseback of 23 United Kingdom care homes with an initial annual cash yield of 7% and 2.5% annual escalators.
- Omega recorded $6.0 million of impairment charges on three Florida skilled nursing facilities and classified one Alabama facility, with a carrying value of approximately $4.1 million, as held for sale.
- Key risks include operator financial condition and bankruptcy, Medicare and Medicaid reimbursement reductions, regulatory and quality-of-care requirements, tenant concentration, interest-rate and capital-market conditions, REIT qualification, integration and realization of benefits from Aviv, and foreign currency and regulatory risks from United Kingdom investments.
- New Ark represented approximately 13% of total investments and 11% of operating revenue; Genesis represented approximately 10% of operating revenue.
- Management reported that pending litigation relating to the Aviv merger had been dismissed and that the appeal period had expired.
Important facts for investors to verify
- Reconcile post-merger results and leverage after including Aviv’s properties, debt, operating partnership interests and issued shares.
- Assess operator coverage, rent collections and exposure to Medicare and Medicaid reimbursement changes, particularly for New Ark and Genesis.
- Review the sustainability of the dividend relative to FFO, operating cash flow and required REIT distributions.
- Verify debt maturities, variable-rate exposure, covenant headroom and borrowings drawn after the April 1 credit-facility amendments.
- Monitor the three impaired Florida facilities and the five properties classified as held for sale.
- Evaluate the effect of United Kingdom expansion and British pound fluctuations on future results and liquidity.
- Confirm the impact of the Aviv integration, including expected synergies, incremental costs and potential conflicts involving operating partnership unitholders.