Skilled nursing real estate investment trust (REIT) Omega Healthcare Investors, Inc. (NYSE: OHI) closed the books for the third quarter of 2017 in the red, reporting a net loss of $137.5 million, or 67 cents per common share.
The Hunt Valley, Md.-based REIT’s relationship with troubled operator Orianna Health Systems was one major culprit, the company stated in a Monday press release. Already, it has started to transition its Orianna SNFs to new operators.
Omega recorded an impairment loss of about $194.7 million associated with its remaining direct financing lease portfolio with Orianna. Additionally, Omega recorded about $11.9 million of provision for uncollectible accounts during the third quarter of this year.
‘Active discussions’ regarding Orianna
Omega’s third-quarter 2017 revenue of $194.06 million missed analysts’ expectations by $44.04 million.
There currently are “active discussions” with Orianna regarding the transition of its remaining portfolio to new operators, according to Omega CEO Taylor Pickett.
Since 2014, occupancy for the Nashville-based health system has declined from 92% to 89%; revenue has grown by a mere 2%; and operating expenses have grown by 6%, Pickett explained in the press release.
“We believe that for some of the Orianna facilities, new operators may be able to improve occupancy and reduce expenses; however, based on current facility performance, we anticipate that the current annual contractual rent of $46 million will likely be reduced to a range of $32 million to $38 million once the transition process is complete.” Pickett said. “The transition timing is expected to take approximately six months.”
According to Omega CFO Bob Stephenson, Orianna did not complete its revised operating plan and did not pay its full contractual rent. Because of this, Omega placed them on a cash basis and, consequently, Omega’s third quarter results—including adjusted funds from operation (AFFO) and FAD—do not include any revenue related to Orianna.
“Since 93% of our Orianna portfolio was classified as a direct financing lease, placing them on a cash basis and initiating the process to transition some or all of their portfolio to new operators also required us to record several large provisions related to the direct financing leases during the quarter,” he said.
In July 2017, Omega 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.
Other Q3 activity
Omega completed approximately $203 million of new investments, and $36 million in capital renovations and construction-in-progress in the third quarter of 2017.
Included among them is the $200.4 million acquisition of 15 SNFs for approximately $191 million from two unrelated third parties. The 15 Indiana SNFs—with approximately 2,074 beds—were added to an existing operator’s master lease with an initial annual cash yield of 9.5% and 2.5% annual escalators, according to the company.
As of market close on Monday, Omega’s stock took a 2.45% dip to $30.97 per share.
Written by Carlo Calma