Conditions stemming largely from the omicron variant of Covid-19 have halted the recovery process for one of the nation’s largest owners of skilled nursing facilities, Omega Healthcare Investors (NYSE: OHI).
Luckily, omicron has not exacted too steep a toll on residents’ health, but it has created severe staffing challenges and suppressed occupancy; resulting liquidity issues for some of Omega’s operators — including Guardian, Gulf Coast and Agemo — meant they could not meet their rent obligations to end 2021.
And those challenges are expected to continue in 2022. More tenants have already expressed concerns as they look ahead, so Omega CEO Taylor Pickett is sure that more restructurings will occur.
“I’m sure we will have more: they might be small, they might be bigger, but … there’s no doubt we’re going to be having these discussions for a few more quarters, just no doubt in my mind,” he said Thursday during the company’s Q4 2021 earnings call.
Revenue for the fourth quarter for Omega was approximately $250 million compared to $264 million for the fourth quarter of 2020 as the year-over-year decrease was attributed to lease write-offs.
The REIT’s adjusted funds from operations (FFO) of $0.77 per common share missed analyst estimates by $0.04, and Omega shares were down 6.49% at the close of regular trading on Thursday.
As of December 31, 2021, Omega had an operating asset portfolio of 939 facilities with approximately 96,000 operating beds.
Stagnant occupancy
A skilled nursing recovery is dependent on labor challenges and COVID-19 infection rates easing, but occupancy is “ultimately” what Omega is focused on, Pickett said on Thursday’s call.
Overall, occupancy for Omega’s portfolio slowly trended upward throughout 2021, reaching a high of 75.8%. Then came the fourth quarter.
Skilled nursing occupancy for Omega’s tenants was virtually flat for three months to end 2021, with preliminary January numbers showing occupancy to be slightly down.
“The omicron variant has paused the SNF occupancy recovery and created further stress for labor,” Pickett added.
By December, 21% of Omega’s facilities were at or above pre-COVID occupancy, and some of those properties were not SNFs. However, Pickett hopes it is an indication that “full occupancy recovery is achievable over time.”
And he is confident that demand exists — the issue is that staffing shortages have limited many facilities’ ability to admit new residents, and the already difficult labor shortage has grown increasingly worse as staff infected with omicron have been forced to quarantine.
The labor crisis not only is holding back occupancy but is driving up expenses, as operators turn to agency workers to fill in gaps.
In Q3 2021, on a per-patient-day basis, agency use in Omega’s core portfolio was 5x what it was in 2019, when agency use was minimal, according to SVP of Operations Megan Krull.
But it’s hard to generalize or identify patterns in terms of which operators are struggling versus weathering the current, severe headwinds.
“I know certain operators are obviously affected more than others, but you have some buildings that hardly have any agency or no agency at all, and then you have other buildings where it’s a very large percentage of their workforce at any given point in time,” said Krull.
Pickett is optimistic that agency use will “get back into balance” over time, but he could not predict how long that would take.
Rent deferrals
The issues besetting Omega’s operators are being felt across the industry. For instance, Sabra Health Care REIT (Nasdaq: SBRA) announced similar challenges to begin the first quarter of 2022 after amending its master lease with one of its tenants, Avamere Family Companies, this week.
Omega identified several operators in arrears on rent.
Agemo Holdings, representing approximately $53 million or 5.5% of annual revenue, stopped paying rent and any interest in August 2021, and with the exception of November, every month since.
Omega drew upon existing security deposits of approximately $9.5 million to pay all rent due for August, September and a portion of October, thereby exhausting its deposits.
“We are in ongoing discussions with Agemo, which may involve the releasing or sale of a material portion of their portfolio,” Omega COO Daniel Booth said.
Guardian, representing approximately $37 million, or 3.8% of annual revenue, failed to pay any of its contractual rent and interest in the fourth financial quarter of 2021 and will likely see its lease structure amended as a result.
“We have been and continue to be in active ongoing discussions with Guardian to transition a significant portion of this portfolio to an unrelated third party,” Booth said. “The exact number of facilities involved and the timing of such transitions is still being finalized.”
An additional unnamed operator with facilities spread across several southern states, representing 3.5% of contractual annualized rent and mortgage interest revenue, also did not pay its January contractual amount due and asked for a short-term rental forbearance.
Also in the fourth quarter, tenant Gulf Coast Health Care filed for bankruptcy and was sold.
All these fluid situations make calculating a run-rate for Omega difficult, Stifel analysts said in a note on the earnings. Still, they are bullish on the stock, given where shares were trading versus their estimate.
“We believe the bad news is more than priced in,” they wrote.
Omega expects to continue to face liquidity challenges throughout 2022 and while additional Provider Relief Funds totaling $2 billion are “welcomed” by the health care REIT, Krull did not see it being anywhere close to a “cure all.”
In addition, lawmakers in Florida, where Omega has its largest presence, proposed a $375 million Medicaid funding increase for nursing homes. The increase would provide almost $550,000 per care center in the state in the hopes of infusing some much needed resources for nursing homes to invest in their workforce.
“Time will tell how that shakes out, what we start with and what we end up with are not always the same thing,” Pickett added.
An active pipeline
Omega’s leaders were more upbeat on the state of their balance sheet and the investment and disposition outlook.
In 2021 Omega made $841 million in new investments, including $164 million for capital expenditures.
In January, the company completed an $8 million purchase lease transaction for one skilled nursing facility in Maryland.
The current pipeline is “incredibly active,” Pickett said.
Future acquisitions could be funded in part by proceeds from the 41 facilities that Omega has classified as held for sale. Already, 22 former Gulf Coast facilities are under agreement to be sold for gross proceeds of $318 million.
Pricing for SNFs currently is high, with buyers underwriting on historical performance and expectations of future performance, Pickett noted.
High prices could constrain Omega’s ability to acquire properties, in which case the REIT could opt to buy back shares with the proceeds from sales. The board recently authorized a $500 million repurchase program.
“Hopefully, we deploy it through the pipeline but it is another tool in the toolkit,” Pickett said, of the buyback program.
Companies featured in this article:
Agemo Holdings, Guardian Healthcare, Gulf Coast Health Care, Omega Healthcare Investors
