Business Context and Reporting Period
Company: Omega Healthcare Investors, Inc. (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Business Overview: Omega invests in healthcare-related real estate, primarily skilled nursing facilities (SNFs), through triple-net leases and fixed-rate mortgage loans. As of September 30, 2009, the portfolio consisted of 256 facilities in 28 states. The company continues to operate two facilities (previously taken back from a bankrupt tenant) pending regulatory approval for transfer to a new operator.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Balance Sheet (Sep 30, 2009) |
|---|---|---|---|
| Total Operating Revenues | $49,753 | $148,065 | - |
| Net Income | $21,138 | $65,872 | - |
| Net Income Available to Common | $18,867 | $59,058 | - |
| Funds From Operations (FFO) | $29,960 | $92,096 | - |
| Net Cash Provided by Operating Activities | - | $114,435 | - |
| Total Assets | - | - | $1,336,393 |
| Total Liabilities | - | - | $522,240 |
| Total Stockholders' Equity | - | - | $814,153 |
| Debt (Revolving + Unsecured) | - | - | $493,685 |
| Cash and Cash Equivalents | - | - | $646 |
Material Changes vs. Prior Period
- Revenue: For the nine months ended September 30, 2009, total operating revenues increased by $3.5 million (2.4%) compared to the prior year. This was driven by an $8.6 million increase in rental income from new acquisitions and a $2.2 million increase in mortgage interest income. These gains were partially offset by a $5.8 million decrease in nursing home revenues from owned and operated assets, as 13 of 15 facilities previously operated by the company were transitioned to a third-party operator in September 2008.
- Expenses: Operating expenses decreased by $7.1 million for the nine-month period, primarily due to a $5.1 million reduction in nursing home operating expenses following the transition of facilities and a $4.3 million decrease in the provision for uncollectible accounts receivable.
- Income: Net income available to common shareholders increased by $4.1 million (7.4%) for the nine-month period, rising from $54.986 million in 2008 to $59.058 million in 2009.
- Debt Structure: The company replaced its previous $255 million credit facility with a new $200 million revolving senior secured credit facility in June 2009. Outstanding borrowings under the revolving line decreased from $63.5 million at year-end 2008 to $9.0 million at September 30, 2009.
Guidance, Outlook, and Risks
- Regulatory Environment: Management highlights significant risks related to Medicare and Medicaid reimbursement rates. A final rule for fiscal year 2010 includes a 3.3% reduction in payments due to case-mix recalibration, partially offset by a 2.1% market basket adjustment, resulting in a net 1.1% decrease in aggregate Medicare payments. State budget deficits may also lead to reduced Medicaid funding.
- Liquidity: The company maintains $191.0 million in availability under its new credit facility. Management believes cash flows from operations and available capital are adequate to fund operations, debt service, and dividends for the next 12 months.
- Dividends: The Board declared a common stock dividend of $0.30 per share (payable November 16, 2009) and regular quarterly dividends on Series D Preferred Stock. The company is required to distribute at least 90% of taxable income to maintain REIT status.
- Unusual Items: The company recorded a $4.5 million net gain in the first quarter of 2009 from a litigation settlement regarding a former tenant. Additionally, a $0.5 million non-cash charge was recorded for the write-off of deferred financing costs associated with refinancing the credit facility.
Investor Verification Checklist
- Reimbursement Sensitivity: Verify the impact of the 1.1% net Medicare payment reduction and potential state Medicaid cuts on the financial stability of the top operators (CommuniCare, Sun Healthcare, Advocat), which collectively represent over 40% of the portfolio.
- Owned and Operated Transition: Confirm the timeline for the regulatory approval required to transfer the remaining two owned and operated facilities to the new operator, as continued operation exposes the company to direct operating risks.
- Debt Covenants: Review compliance with the new credit facility's financial covenants, specifically the maximum leverage ratio and the limitation on distributions to 95% of cumulative FFO.
- Asset Quality: Assess the status of the two SNFs classified as "held for sale" with a net book value of $0.9 million and the potential for further impairment losses given the challenging market conditions.