Omega Offers Details on $735M Skilled Nursing Pickup, Ongoing Daybreak Woes

Omega Healthcare Investors (NYSE: OHI) made a major splash this week with the announcement of a planned $735 million skilled nursing acquisition, though executives also reported that a troubled tenant in Texas hasn’t generated any revenue for the real estate investment trust (REIT) yet this quarter.

Daybreak Venture met its rent obligations under a deferral agreement that covered the first two quarters of the year, Omega chief operating officer Daniel Booth reported on a Wednesday call with investors and analysts — but the REIT also announced that it has not recognized any income to date from Daybreak during the current third quarter.

“Continued pressures on overall occupancy, Medicare census, and labor costs have resulted in even tighter liquidity,” Booth said of Daybreak, which had missed rent in previous quarters before entering into a deferral agreement with landlord Omega.

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Both landlord and operator had been banking on a novel proposal in the Texas legislature to boost Medicaid rates in the state, which have historically lagged behind reimbursements elsewhere. That effort died on the vine, however, and the Lone Star State’s lawmakers won’t convene again for another two years.

“During the quarter, the Texas state legislature failed to pass any form of skilled nursing Medicaid rate relief, meaning that operators in the state will have to deal with the same Medicaid reimbursement rates — which are one of the lowest in the country,” Omega CEO Taylor Pickett said in a Tuesday statement.

Because of its wide geographic footprint, concentration in rural areas, and lack of exposure outside of Texas, Daybreak finds itself particularly vulnerable to the state’s “woefully low Medicaid rate,” Booth said on the Wednesday call, with a weaker Medicare census and overall occupancy. As a result, Omega has engaged with a third-party consulting firm to review Daybreak’s operations and provide a long-term analysis of projected future cash flows.

Still, Omega executives insisted that it’s not all bad news in Texas, with 26 more properties set to enter the state’s Quality Incentive Payment Program (QIPP) — which rewards operators with higher Medicaid rates by improving specific quality measures — on September 1. In addition, Booth noted that the ongoing distress in the state could open up some potential acquisition opportunities in the future.

“We are going to be opportunistic in Texas, because I do think there’s going to be some opportunities,” Booth said.

As for the REIT’s move to pick up 58 skilled nursing facilities in a $735 million deal announced Tuesday, Omega officials emphasized that a non-disclosure agreement prevents them from diving too far into the details at this point. The sellers and operators remain undisclosed, though Omega did announce Tuesday that the portfolio has two operators, covered by three master leases across eight states.

However, they offered some hints Wednesday, pegging the skilled mix in the portfolio — which also includes a pair of assisted living facilities — at north of 20%, with annual rent escalators of 2.25% to 2.5%.

The deal will also see Omega assume $390 million in loans backed by the Department of Housing and Urban Development (HUD), which must sign off on the transaction before the parties can close. As a result, Omega declined to provide a firm date, with executives noting that the process could take anywhere from three to nine months.

That sizable transaction wasn’t the only deal the company touted in conjunction with its earnings: Omega also picked up a trio of SNFs in Virginia and North Carolina for $24.9 million in a separate transaction that closed back in July. The REIT added those properties to an existing master lease.

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