While Covid cases have fallen “exponentially” for real estate investment trust Omega Healthcare Investors (NYSE: OHI) with noted occupancy recovery seen in Q1 2022, its skilled nursing tenants continue to face operating challenges as staffing shortages and increased expense pressures have led to continued rent deferrals and nonpayments.
With 14.5% of Omega’s contractual rents and interests involved in restructuring discussions and 12.3% of contractual rents not paid in the first quarter, one of the sector’s most active REITs expects rent complications to persist throughout 2022.
“Unfortunately, staffing shortages and elevated costs continue to pressure operating cash flows and the ability to admit new residents,” CEO Taylor Pickett said during Omega’s first quarter earnings call on Tuesday. “At this point it is impossible to predict how quickly industry occupancy will fully recover or how rapidly the current labor force pressures will subside.”
Still, the recent sale of the Gulf Coast Health Care portfolio and imminent completion of the restructuring of Guardian Healthcare provide Omega with “strong momentum” to eventually return to “comfortable” funds available for distribution (FAD) payout ratios, Pickett said.
Gulf Coast Health Care filed for bankruptcy last year and Omega sold a majority of the portfolio in March for more than $300 million.
While the overall operating environment remains difficult due to waning government support and other regulatory headwinds, Stifel analysts felt Omega’s valuations remain attractive, according to a note published Tuesday.
Omega Healthcare Investors reported Q1 2022 adjusted funds from operations (FFO) per share of $0.74, above both Stifel’s estimate – $0.71 – and $0.70 consensus.
Revenue for the first quarter was approximately $249 million, compared to $274 million for the first quarter of 2021.
The year-over-year decrease was primarily attributed to the revenue recorded in Q1 2021 related to Gulf Coast, Agemo and Guardian — all cash based operators — as well as revenue related to asset sales that occurred after Q1 2021, according to Omega Chief Financial Officer Robert Stephenson.
All three operators struggled to meet rent obligations starting at the end 2021 and continuing into 2022.
As of March 31, Omega had 938 facilities in its operating asset portfolio – 735 of which are SNFs or transitional care facilities – with approximately 79,669 SNF beds.
Varied occupancy recovery
Occupancy continues to be the driving force behind recovery for SNF operators as Omega’s overall portfolio reached 77.9% as of mid-April, up from a 2021 high of 75.8% reached in December.
The portfolio’s occupancy took a slight dip in January due to the omicron surge but started to trend back up in February.
“The good news is that we’re starting to see traction on the occupancy recovery front despite the staffing challenges,” Megan Krull, senior vice president of operations, said during the call. “As of February, approximately 25% of core facilities have now recovered from an occupancy perspective.”
But that hasn’t been the case for the entire portfolio as some operators continue to deal with self-imposed admission bans due to staffing shortages, delaying a more complete recovery for Omega.
Nursing and agency expenses were more than six times higher in the fourth quarter of 2021 compared to 2019 for Omega’s core portfolio as these expenses continue to hamper operators, according to Krull.
“Now more than ever, it is critical that the states step up to ensure that rates keep pace with the persistent increased expenses, including after the public health emergency when the increase in FMAP will no longer be in effect,” Krull said.
She hoped the administration would “contemplate” any modifications to regulatory oversight and recognize the nuances of the industry with extreme staffing challenges and increased expense pressures during the tailend of an unprecedented pandemic.
The Centers for Medicare & Medicaid Services (CMS) last month unveiled a 4.6% cut to the Patient-Driven Payment Model (PDPM) and 3.9% increase to Medicare payments for the sector. The PDPM cut amounts to a total loss of $320 million in Medicare funding, according to the agency.
Pickett said it was a little “disappointing” that there wasn’t more discussion from CMS about phasing in the PDPM adjustment.
“That would be helpful given the environment this year,” he said. “We’re hopeful that over the next 60 days that perhaps there’s a shift and the adjustment isn’t just all at once. That being said, we know it’s eventually coming.”
More rent deferrals could be coming
Omega divested 27 facilities in Q1 for total proceeds of $333 million.
As operator challenges persisted, Omega implemented several strategies for restructuring including rent deferrals, asset sales or transitions to a new operator, and in certain cases, rent resets with other amended lease provisions, Omega Chief Operating Officer Dan Booth explained.
While Pickett thinks it may be the “bottom” as it relates to operators that have already filed for rent restructurings with the company in the past, that doesn’t mean more won’t arise in the coming months.
“We still need to be wary of the next couple of quarters,” he said.
Though Pickett couldn’t quantify a percentage, there are “smaller operators” that are struggling that Omega has already had discussions with from a payment perspective.
“If the health emergency isn’t extended beyond July, that will create some additional pressures,” he said. “We feel good about the resiliency of portfolios that the team has been able to work through but I’d still stress that we’re not through this.”
Companies featured in this article:
Guardian Healthcare, Gulf Coast Health Care, Omega Healthcare Investors
