‘The Haves and Have Nots’: Omega Closely Monitors Moves to Make Medicaid Rate Bumps Permanent

Nursing home sector leaders and financial backers are basing their future plans heavily on Medicaid rate increases seen across the country, as some states meet the moment with substantial increases to combat inflationary pressures and staffing costs.

Others, meanwhile, haven’t increased rates in a meaningful way and have not kept pace with increased costs that have led to market-specific portfolio strain.

Leadership at Omega Healthcare Investors (NYSE: OHI) continue to monitor the “haves and have nots” across states, Senior Vice President of Operations Megan Krull said during the real estate investment trust’s (REIT) Q3 earnings call on Thursday.

Krull used Florida as an example, noting the state approved a 7.8% rate increase that somewhat kept pace with inflation. The state’s Federal Medical Assistance Percentage (FMAP) funds, however, were very limited and only released in late 2021, which put a strain on certain portfolios, she said.

Krull used Texas as another example. Operators in the state are pushing to get a $19.63 add-on per patient day (PPD) made permanent; the temporary Medicaid increase was implemented in April 2020.

The Texas legislature, which only meets every two years, is set to make a decision on the add-on between April and May, Krull said. Kentucky, another state in Omega’s footprint, looks to extend a $29 PPD FMAP increase through June of 2023.

“It’s very evident that industry is still deeply entrenched in the recovery phase of this pandemic, and will be for quite a long time,” added Krull. “We can only hope that the states, even on a mild basis, will increase rates commensurate with increased costs.”

Ensign Group CEO Barry Port echoed Krull’s comments in the operator’s earnings call last week. Port pointed to a potential “gap” between FMAP funding, which is tied to the public health emergency (PHE) set to end in January, and more permanent Medicaid rate increases included in state budgets.

Falling in line with SNF operators and their advocacy groups, Krull also urged the Centers for Medicare & Medicaid Services (CMS) to add funding mechanisms to its costly mandates, referring to the Biden administration’s reform initiatives outlined in February.

Agemo restructuring and other portfolio updates

The most notable portfolio update for Omega concerns the continued restructuring of lease and loan agreements with Agemo Holdings. The REIT sold two Agemo facilities during Q3 and 19 other facilities were sold so far in Q4 of this year.

Third and Q4 Agemo sales bring gross proceeds to $316 million; 21 Agemo assets across Florida, Georgia and Maryland have been sold to date for $359 million. Omega’s COO Dan Booth anticipates an additional facility in Florida will be sold in the coming weeks.

The remaining Agemo portfolio consists of 18 facilities in Tennessee and 11 in Kentucky, he said. The operator did not pay contractual rent or interest due under its lease and loan agreements during Q3.

Sales come on the heels of restructuring agreements with Guardian Healthcare in April — selling 12 facilities and releasing eight facilities — and Gulf Coast Health Care in May, selling its assets for more than $300 million following the now defunct operator’s filed bankruptcy and dissolution in April.

Omega continues to have ongoing restructuring discussions with two other operators, Pickett said, as inflationary costs, Medicaid reimbursement and occupancy challenges make for an uncertain future.

Occupancy for Omega’s core portfolio “suddenly trended up” this year, from 74.6% in January to 80% mid-October, according to Booth.

Krull said self-imposed admission bans due to staffing shortages and attempts to “eradicate” agency use has crippled operators from a higher occupancy boost.

About 54% of Omega’s core facilities have recovered completely or are within 5% of pre-Covid occupancy levels, she said.

Strong balance sheet

This marked Omega’s 11th Covid-era earnings call, Pickett said, but he feels the REIT has a pathway to potentially exiting the pandemic with “limited financial damage.”

Stifel analysts said Q3 came in a “bit better” than their expectations, with a few more tenants paying rent and a few less not paying rent – analysts chalk this up to an improving SNF operating environment.

In keeping with comments from Omega’s leadership, analysts said headwinds remain – occupancy pace and high labor costs included – but these headwinds are “less bad.”

Analysts at Mizuho said Omega beat their expectations as well – Omega had strong acquisition volumes and enhanced liquidity during the quarter, according to a note issued Thursday.

The REIT has narrowed its operator base from 70 in Q1 of 2020 to 63 in Q3 of 2022, Pickett said, although he expects Omega will continue to grapple with ongoing Covid-related operator issues for the next year and a half.

Omega has an operating asset portfolio of 916 SNFs, or approximately 92,000 beds.

“Our rock solid balance sheet and resilient operator franchise, along with our active day-to-day portfolio management – which includes supporting our operators with best practice communication and industry lobbying efforts – put us in a relatively solid position to continue to return capital to our shareholders and to continue deploying growth capital to our operators,” noted Pickett.

Revenue was lower than Q3 2021, with revenue totaling $239.4 million – a decrease of $42.2 million. The decrease was tied to asset divestitures completed in 2021 and 2022, operator restructurings and no rental income or interest income from Agemo.

Net income for the Q3 was $105 million, or 43 cents per common share, a drop from $143 million, or 58 cents per common share during Q3 2021.

NAREIT funds from operations for the quarter was $159 million, or 65 cents per common share. During Q3 2021 was higher at $181 million, or 73 cents per common share.

Highlights from the quarter include the sale of four facilities for $51 million in cash proceeds, generating a $41 million gain, Omega reported.

The REIT also reported $28 million in the acquisition of four assisted living facilities in the United Kingdom, $19 million put toward capital renovation and construction projects, and $40 million for a new mezzanine loan that bears interest at 12% per annum with a new operator.