Omega Healthcare Investors, Inc. (NYSE: OHI) faced serious stress from multiple operators in the third quarter, leading executives to consider a more regional strategy going forward.
The Hunt Valley, Md.-based real estate investment trust (REIT) on Monday reported a net loss of $137.5 million in the third quarter, posting revenue of $194.06 million—missing analysts’ expectations by $44.04 million.
The company attributes its relationship with Orianna Health Systems as a contributing factor in its underwhelming performance, as occupancy at the Nashville-based operator of skilled nursing facilities and rehabilitation centers has been declining.
In addition, the financial performance of two other providers has put a strain on Omega’s overall portfolio, according to Omega COO Daniel Booth.
If there’s one lesson the REIT has learned this quarter, officials said, it is that its investments in regional players is where its future growth lies.
Orianna has fallen “significantly behind” on its rent payments, prompting the REIT to place the provider on a cash-basis account, Booth explained on Omega’s third-quarter earnings call with investors Tuesday.
Since 2014, the health system’s occupancy has fallen from roughly 92% to 89%, according to a company press release.
“While we have endeavored to assist Orianna in streamlining operations by transitioning both their Northwest and Texas regions, the overall portfolio continues to struggle and past-due rent has grown,” Booth said.
Orianna’s expansive geographic footprint became a challenge for the portfolio, according to Booth—making the company re-think how it approaches investments moving forward.
“One thing with Orianna that was a little bit unique was the geographic dispersion of this portfolio—there were assets in the northwest, there were assets in Texas, and … in the southeast,” Booth said during the earnings call.
This deviates from the REIT’s usual underwriting process, in which it aligns itself with operators with regional portfolios, he explained.
“This was a multi-regional portfolio, which is just a lot harder to manage. So, I think if we learned anything … we’ll stick with acquiring portfolios of a regional nature. Or, if we acquire bigger portfolios that are in multiple regions, then we’ll bifurcate those with our different operators in those different regions,” Booth said. “The success that we’ve had over the years are with operators that tend to stick within a given region and focus on that region.”
Chad Vanacore, an analyst at St. Louis-based financial services holding firm Stifel (NYSE: SF), acknowledged the company’s focus on regional players.
“I think that Omega has been paring its relationships with smaller operators and focusing more on growing regional players,” Vanacore explained in an e-mail to Skilled Nursing News. “The strategy seems to be: Look for operators who know their markets well and can gain scale and market share, but aren’t too large to overlook the facility-level details.”
Omega’s next step is to “consensually transition” the remainder of the Orianna portfolio of 42 facilities by virtue of either asset sales or releasing them to other operators, according to Booth.
This play just might be the best move for the company, according to Vanacore.
“Omega has historically shown that they are adept at finding new operators to replace underperforming tenants,” he said. “They have the broadest reach of relationships with skilled nursing operators and [the] most diversified portfolio with 77 tenants, so we expect them to be able to execute their plan and transition these properties to new operators.”
Omega has already put this plan into motion: In fact, in July 2017, the REIT transitioned nine Orianna skilled nursing facilities (SNFs) in Texas to an existing operator of Omega; these SNFs were added to the current master lease with that operator. CEO Taylor Pickett also noted that the company sold off its Northwest Orianna portfolio to a pair of buyers during the third quarter of 2017.
Compounding Omega’s troubles with its Orianna assets is the firm’s Signature HealthCARE portfolio. The Louisville-based health system has also fallen behind on rent in the third quarter, primarily as a result of anticipated restrictions on its borrowing base by its capital lender, according to Booth.
Despite the situation, Booth believes that the firm can reach an “out-of-court restructuring” resolution with Signature, which may possibly involve deferred rent, capital expenditure funds, or a working capital line of credit.
Likewise, Omega’s Daybreak Venture LLC tenant has also fallen behind on rent. Omega has negotiated a settlement and forbearance agreement with the Denton, Texas-based health care provider, resulting in rent payments that are 23% less than the contractual rate in the third quarter.
Beginning in January, Omega expects rent to return to the full contractual amount; in addition, past-due rents will begin to be repaid in the latter half of 2018, according to Booth.
“Omega has faced some operator-specific headwinds in recent quarters,” Pickett said during the call. “However, I believe that the underlying business environment is solid and is positioned to improve in the coming years, as favorable demographics and limited supply should lead to a prolonged period of robust operating performance.”
As the end of the calendar year approaches, analysts at Stifel predict that Omega’s adjusted funds from operations (AFFO) will be valued at 76 cents per common share, according to Vanacore.
Omega’s stock took a 6.81% dip on Tuesday, closing trading at $28.26 per share.
Written by Carlo Calma