Omega Healthcare Investors (NYSE: OHI) reported that it collected 99% of contractual rent and mortgage payments for the month of July, with the exception of one skilled nursing operator that had been struggling well before the COVID-19 pandemic hit — a testament to the various financial aids provided by state and local governments.
But Omega CEO Taylor Pickett noted that both facility costs and occupancy “have been meaningfully impacted by COVID-19.”
“While we have seen a moderating deterioration of operating metrics, it is too soon to conclude that we have reached a floor in operator financial performance,” he said in the earnings press release. “In the face of these challenges, the federal government and many states have been proactive in providing vital financial support to the industry.”
For Omega, that help included funding from the CARES Act for SNFs based on their Medicare reimbursement, with $4.9 billion allocated for SNFs with Medicare-certified beds. That was distributed to SNFs with a baseline payment of $50,000, plus $2,500 per bed.
“That equated to greater than $250 million for the Omega portfolio,” senior vice president of operations Megan Krull said on the earnings call.
She also noted that many state governments, including Texas, have used the 6.2% Federal Medical Assistance Percentage (FMAP) increase in the CARES Act to increase rates for facilities, though many other states have not done so.
In response to questions about the sufficiency of government aid, Pickett estimated that the funds would likely see the REIT through August, with “a pretty high likelihood the funding takes us towards the end of the year, and I think that’s the view of the operators.”
Omega reported net income of $102 million, or 43 cents per share, for the second quarter of 2020, compared with net income of $75.7 million, or 34 cents per share, in the year-ago period.
The Hunt Valley, Md.-based real estate investment trust (REIT) also sold seven facilities for $38 million in cash, realizing $13 million in gains, in addition to completing $50 million in new investments, including the $7 million purchase-lease transaction of a SNF in Ohio on June 30th. The facility was an added to an existing master lease for an initial cash yield of 9.5%, with 2% annual escalators. Omega also provided $43 million in mortgage financing to the same operator, secured by two SNFs in Ohio.
Daybreak Venture, an operator that had given the REIT problems throughout the course of 2019, was the exception for contractual rent; the operator is transitioning its portfolio pursuant to a forbearance agreement.
“For the foreseeable future, Omega’s investment appetite will be modest, focusing on our existing operators’ capital needs and any potential new investment opportunities they may source,” Omega COO Daniel Booth said on the call.
Occupancy fell approximately 8% from February until mid-July as reported by Omega’s operators, Booth said on the call, with July occupancy mainly unchanged from June, though quality mix increased approximately 1% from January to mid-July, he noted. This was primarily due to operators being able to skill in place under temporary waivers of the three-day hospital stay rule for Medicare coverage.
“It is important to note that the variability in both occupancy and operating expenses is closely correlated to the number of confirmed COVID residents within a given facility,” Booth said.
Omega-owned facilities are slated to receive 30 of the initial 635 point-of-care antigen testing devices that the Department of Health and Human Services (HHS) will be sending to nursing homes, Krull said.
While operators are able to take advantage of the enhanced rates in the Patient-Driven Payment Model (PDPM) for COVID-19 patients, any expense savings from the use of group and concurrent therapy has disappeared amid the suspension of communal activities, Omega observed.
And when it comes to occupancy, it’s not clear when numbers will rebound, especially as elective surgeries are either banned or delayed because of COVID-19 concerns.
“A number of the states have opened up hospitals to elective surgeries, but we really haven’t seen a lot of people going forward with elective surgeries, to be honest with you,” Pickett said on the call. “It certainly hasn’t gone back to what it was pre-COVID, and so [facilities] are just not seeing the type of discharges that they were before. I think that’s still going to take some time, to see people that are prepared to go into hospitals … and potentially a SNF after that.”
But he emphasized that Omega is confident in its operators, noting that operators have not been coming to the REIT for discussions about rent relief at least for now, with no deferrals granted to tenants yet.
“We have 20 fewer operators today than we had three years ago, so we spent a lot of time working through that part of our portfolio the past three years, so I think we’re at a point where we’re feeling very good about our operators,” Pickett said. “But [the COVID-19 environment] just highlights how important that is in running this business.”