Omega: Increase in Medicaid Days Shows Demographic Wave’s Early Effects

Executives at Omega Healthcare Investors (NYSE: OHI) on Wednesday expressed optimism about the skilled nursing industry in the long term — and even believe that there’s some near-term upside amid payment increases from the federal government and new models of reimbursement on the horizon.

In addition, leaders at the real estate investment trust (REIT) even saw a silver lining in a slight gain in Medicaid census, identifying the shift as the potential harbinger of the long-awaited demographic wave of aging Americans.

Though the SNF industry “remains challenged,” and Omega’s SNF operator tenant Daybreak is facing some particularly tough hurdles, the coming of the Patient-Driven Payment Model (PDPM) in October and the proposed 2.5% increase in Medicare reimbursement are reasons for the positive outlook, CEO Taylor Pickett said on the company’s first-quarter earnings call.

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That sentiment was echoed by others at Omega.

“So many people have done crosswalks from the old system to the new, and it always comes out at or about revenue-neutral,” COO Daniel Booth said on the call. “So I think on the revenue side, it’s very unlikely we see downside from PDPM. And just to be clear, it’s the first time that I’ve ever spent in this industry where so much time was spent between CMS and the industry in crafting a plan. So I just don’t see any surprises.”

Omega reported net income of $72.2 million, or 34 cents per common share, for the first quarter of 2019, compared with net income of $87.9 million, or 42 cents per share, in the year-ago period. The Hunt Valley, Md.-based REIT logged operating revenue of $223.7 million for the first quarter of this year, compared with operating revenue of $220.2 million the same time last year.

The decrease in net income for the quarter was primarily due to several factors: a $17.5 million reduction in gains on the sale of assets, an increase of $2.9 million of costs related to the acquisition of MedEquities Realty Trust, and $2.8 million of impairments on direct financing leases and real estate properties.

Medicaid uptick shows changing demographics

Omega — along with many other players in the SNF space — has long touted the idea of nationwide demographic changes as the catalyst that will turn around SNF fortunes. In fact, last year, Pickett predicted that the demographic demand wave would be felt heading into 2019.

In the first quarter of this year, Booth noted that to some extent, stability in occupancy has been offset by length-of-stay reductions. But one point for optimism on the demographic front is the fact that Medicaid census is rising slightly, he said in response to analyst questions on the call.

“A little bit of what we’re seeing on the Medicaid side is some of the demographics that we’re talking about, because it’s much longer-term and much less controllable in terms of patient days,” he said.

Omega’s occupancy remained stable, Pickett noted in his prepared remarks.

Daybreak’s outlook on rent

In the fourth quarter of 2018, Omega ran into problems with tenant Daybreak, which operates 57 properties in the REIT’s portfolio and underpaid rent by about $4 million. Omega blamed the operator’s issues on a difficult reimbursement environment in the state of Texas.

Executives at Omega reiterated the operational challenges in Texas, which include “very low Medicaid reimbursement,” but noted that Daybreak has met its contractual obligations under the settlement and forbearance agreement, in which Omega granted the operator a $2.5 million rent deferral in each of the first two quarters.

“Notwithstanding the uncertainties surrounding rate relief in Texas, we are confident that Daybreak will benefit from several known factors, including the addition of 26 Omega facilities into the Texas [Quality Incentive Payment Program] program, the implementation of PDPM, and the 2.5% Medicare rate increase,” Booth said on the earnings call. “All three benefits are slated to become effective on October 1, 2019.”

But it’s not clear, given the uncertainty of whether or not Texas will pass a bill offering some Medicaid relief, whether Omega will have to make more amendments to the settlement and forbearance agreement.

Still, there were some positives. Daybreak’s quality mix picked up slightly in the first quarter, and Omega is hopeful that will continue trending upward or at least stabilize, Booth said in response to questions.

“As far as Texas rate relief, it’s still too early to call,” he said. “The legislation is still in session. It runs through pretty much the end of May and we’re hopeful that they’re able to obtain some rate relief. What form it ultimately takes, we do not know, but I know they’re working around the clock in the state of Texas to try to get some rate relief for our operators.”

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