Omega Inks New Deal with Signature, Sees Hot Local M&A Market

One day after Sabra Health Care REIT (Nasdaq: SBRA) announced a major restructuring deal with skilled nursing provider Signature HealthCARE, fellow real estate investment trust (REIT) Omega Healthcare Investors (NYSE: OHI) followed with an agreement of its own.

The Louisville, Ky.-based Signature had fallen about $25 million behind on its rent payments to Omega by the end of the first quarter, Omega chief financial officer Robert Stephenson said on the REIT’s earnings call Tuesday morning. That figure was offset by a $9.3 million letter of credit and personal guarantees, Stephenson said, and Omega officials remained optimistic that Signature would eventually make its payments under the new structure.

The terms of the deal mirror the agreement with Sabra, with the Hunt Valley, Md.-based Omega providing rent deferments of $6.4 million per year through 2021, along with $4.5 million in annual capital expenditure funds. Omega also extended an up to $25 million term loan for working capital, exceeding Sabra’s similar loan of $12 million.

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“Omega and Signature have enjoyed an excellent, long-standing relationship dating back 20 years,” Omega COO Daniel Booth said. “While this restructuring is certainly not optimal, it was successful in providing for an adequate resolution, while maintaining and incentivizing the existing and well-respected management team.”

Omega executives faced pointed questions from analysts about Signature’s ability to pay back the existing $25 million in missed rent, and the REIT team classified the decision to extend Signature a $25 million loan as necessary to the success of the plan.

“It’s not being drawn day one,” CEO Taylor Pickett said of the credit line. “But it gives them the flexibility to deal with liquidity issues, which is their problem. It’s liquidity to pay the government, to pay the med-mal claims that have been settled and some other vendor issues that are part of the restructure. The thing we didn’t want to do is have them go off without enough liquidity to manage a very, very large enterprise.”

PDPM positivity

Pickett and the rest of the Omega team expressed optimism about the new Patient-Driven Payment Model (PDPM) proposal from the Centers of Medicare & Medicaid Services (CMS).

Released in late April, the PDPM plan for skilled reimbursements has already received cautious approval from the CEOs of Genesis Healthcare (NYSE: GEN) and the Ensign Group (Nasdaq: ENSG), with a general consensus that it represents a more provider-driven upgrade to the previously announced Resident Classification System, Version I (RCS-I) plan that PDPM replaces.

Jeff Marshall, Omega’s senior vice president of operations, lauded the concurrently announced pay rate increase from CMS as a “significant positive development” for the industry. Under the proposal, skilled nursing providers will bring in an additional $850 million in Medicare money in fiscal 2019 thanks to a market basket increase of 2.4%, which is higher than the industry had expected.

Marshall also touted PDPM’s ability to reduce enforcement risks by focusing on care outcomes more than volume — a significant problem for both providers and CMS under the current Resource Utilization Group (RUG) structure, which incentivizes operators to provide as many therapy hours as possible.

“Regulatory pressure against therapy-driven payments should be eliminated, and total payments to the industry will remain the same as under the current RUG system,” Marshall said on the call.

Marshall did have one cautionary note on the recent CMS moves. In announcing the PDPM, CMS also confirmed that a planned 2% Medicare rate cut will take effect in fiscal 2019; providers will be able to earn that money back by hitting certain rehospitalization benchmarks, but Marshall pointed out that CMS projects average net decreases in Medicare reimbursements of 0.6%.

Once the rate-cut math shakes out, the 2.4% market-basket increase from CMS falls to 1.8%, an increase of $639 million or $45,000 per facility.

‘Strategic dispositions’

The first quarter previewed a 2018 of asset dispositions for Omega, which offloaded $98 million in properties in the first three months of the year — with an additional $250 million planned through the end of the 2018.

Omega achieved sale proceeds equivalent to a 10% rent yield, which Pickett attributed to a hot market on the regional level.

“Our strong sales results to date reflect the continued appetite for SNF assets by local-market private buyers,” he said.

Overall, the REIT turned in net income of $87.9 million in the first quarter, down from $109.1 million during the same quarter in 2017. Management blamed the decline primarily on Orianna Health Systems, another troubled tenant currently going through bankruptcy; Orianna paid no rent to Omega during the quarter, a loss of $16.2 million in revenues.

The two parties already have a restructuring plan in place that requires court approval, and Omega management on Tuesday’s call dismissed a CMS objection to the bankruptcy deal as “noise”; the provider has already updated its filings to reflect some of CMS’s concerns.

Omega stock rose $0.71, or 2.62%, to close at $27.80 per share in Tuesday’s trading.

Written by Alex Spanko

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