Real estate investment trust (REIT) Omega Healthcare Investors (NYSE: OHI) is working with struggling skilled nursing tenant Orianna Health Systems to execute a restructuring plan that involves Orianna entering Chapter 11 bankruptcy protection.
Orianna and its affiliates operate 43 skilled nursing centers with approximately 4,500 beds in seven states.
The plan involves transitioning some Orianna properties to new operators and selling others, and Maryland-based Omega is also planning to commit up to $30 million in financing.
Specifically, 4 West Holdings, Inc., or Orianna Health Systems, and some of its affiliates have initiated voluntary Chapter 11 proceedings in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division. Omega entered a restructuring support agreement (RSA) that is expected to serve as the basis for Orianna’s restructuring. The agreement provides for partial rent payments at $1 million per month, prorated for March.
Under the RSA, which is subject to approval by the Bankruptcy Court, 23 of the 42 facilities Orianna currently leases from Omega will be transferred to new operators. The transfers are expected to be approved by the court within 45 days; afterward, the deals are expected to be completed upon the approval of any necessary state regulatory approvals.
In addition, the RSA provides for the sale of the remaining 19 facilities under a plan of reorganization that is expected to be confirmed by the court. The plan confirmation is expected within 110 days; those sales are projected to conclude by the end of 2018.
In addition, Omega will commit up to $30 million in debtor-in-possession financing to help provide liquidity to Orianna as it goes through the bankruptcy proceedings, as well as to repay Orianna’s current working capital lender. The Omega financing is contingent on certain conditions and court approvals.
“We continue to expect that our post-transition restructuring rent for the transition portfolio and rent equivalent for the 19 properties to be sold will ultimately be in our previously-estimated range of $32 million to $38 million,” Omega CEO C. Taylor Pickett said in the release. “Last year, we recorded impairments on our Orianna direct financing leases reflecting assumed annual rents in that range, rental yields between 9% and 10%, and certain assumptions regarding current and projected operating performance of the facilities, coverage ratios and bed values. We do not believe Orianna’s filing for bankruptcy protection materially affects the fair value of the facilities, and accordingly, at this time we do not expect to record further impairments on the Orianna direct financing leases as a result.”
Not surprising
The news didn’t surprise Daniel Bernstein, an analyst at Capital One Securities who covers Omega.
“The headline impact is there but there’s not really a different financial impact than what had been contemplated on the earnings call,” he told Skilled Nursing News, referring to Omega’s most recent earnings update in the fourth quarter.
Eric Fleming, an analyst at SunTrust who also covers Omega, indicated the same in a research note published on Wednesday morning that was seen by SNN.
“While we anticipate some pressure on OHI given the headline, we believe this filing should allow for an orderly and structured transition of the remaining Orianna portfolio,” the note said, adding that the news does highlight “ongoing tenant concerns and overall tough operating environment.”
Omega has reported troubles with Nashville, Tenn.-based Orianna in its past two quarterly earnings conference calls. At least part of the real estate investment trust’s (REIT) struggles in the third quarter of 2017 were attributed to the relationship with Orianna, which fell behind on its rent payments and had to be placed on a cash-basis account.
In the fourth quarter, Omega said it was hoping to reach a final agreement with Orianna, but noted that the timing and outcome could affect its guidance.
“The ultimate outcome of our global resolution with Orianna will likely occur in the later part of 2018,” Pickett said on the conference call. “However, we believe we are close to an agreement to restructure the Orianna portfolio in an organized way.”
Omega’s previously announced guidance assumed it would not record revenue related to the Orianna portfolio for the majority of 2018, and the company’s estimates are not changed by the Chapter 11 filing, Pickett said in the press release announcing the bankruptcy.
“Accordingly, we reaffirm the adjusted funds from operations (Adjusted FFO) guidance contained in our February 13, 2018 earnings release in the range of $2.96 to $3.06,” he said in the release. “Of course, our actual results will depend on the timing of the transitions and sales contemplated by the RSA.”
The restructuring announcement comes on the heels of the takeover of HCR ManorCare by its landlord Quality Care Properties, Inc. (NYSE: QCP). ManorCare filed for Chapter 11 bankruptcy protection on March 4, and QCP is poised to take over ownership of the provider through the bankruptcy process.
“I believe we’re heading into a big period of distress in senior housing and skilled nursing in particular, and these types of things are going to be happening with increasing frequency,” David Gordon, a a bankruptcy lawyer and partner at multinational law firm Dentons, told SNN at the time of the QCP announcement.
Bernstein also said there would likely be more such shakeups in the skilled nursing industry, but he took a broader view.
“[It’s] a potentially positive development long-term for the industry, and potentially the more we get the uncertainty of the bankruptcies and the restructurings out of the way, it can take some overhang off the some of the health care REITs, long-term,” he told SNN on Wednesday. “Long-term, this is what’s needed for both the industry and the health care REITs.”
Written by Maggie Flynn
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