Skilled nursing headwinds are continuing to buffet Omega Healthcare Investors (NYSE: OHI), as the real estate investment trust continues restructuring efforts. But leaders at the REIT are cautiously optimistic about what lies ahead.
Analysts with Stifel shared that optimism, based on Omega’s Q4 2022 earnings results.
“We believe the numbers are essentially bottoming, and that barring some unforeseen issue we should start to see improvement in the next few quarters,” the analysts wrote in a note issued Thursday.
Still, Omega is observing many challenges across its large portfolio of skilled nursing communities. The REIT’s portfolio includes about 900 properties across the United States and the United Kingdom, with 75% of the portfolio being skilled nursing/transitional care facilities.
Given the ongoing challenges to occupancy and staffing, the Biden administration’s intention to end the public health emergency in May is “not particularly ideal,” SVP of Operations Megan Krull said Friday on the REIT’s earnings call.
But Omega’s occupancy is trending up, going from 74.6% a year ago to 78.3% in mid-January 2023. And Omega’s executives are hopeful that states will continue to increase Medicaid reimbursements, helping to offset expense pressures.
“Labor costs continue to pose ongoing challenges, particularly in the widespread use of agency personnel, and many other operating expenses, such as food costs and supplies continue to increase in the face of inflationary pressures,” Omega’s COO Dan Booth said on the earnings call.
Omega’s Q4 FFO of $0.73 beat analyst consensus estimates by $0.02 while revenue of $144.85 million missed by $25.77 million. Omega shares were down TKTK at the end of regular trading on Friday.
Restructuring progress
Omega’s leaders provided an update on tenant restructuring efforts, building on disclosures last month.
Omega continued restructuring with skilled nursing operator Agemo, which included the Q4 2022 sale of 20 facilities for $316 million.. The remaining 11 facilities in Kentucky and 18 facilities in Tennessee are contractually obligated to resume rent and interest in April of 2023.
The Maryland-based real estate investment trust (REIT) said it sold 11 of its LaVie Care Center properties to an unnamed third party for $129.8 million, also providing seller financing of $104.8 million at a rate of 8%. As of the third financial quarter last year, LaVie operated 85 Omega-owned SNFs – 51 in Florida, 13 in North Carolina, nine in Pennsylvania, six in Mississippi, four in Louisiana and two in Virginia.
The seller financing is a reflection of the tighter capital markets and was needed to get this particular deal done, CFO Bob Stephenson said on the call. Going forward, Omega’s leaders anticipate that further restructuring action will involve operator transitions rather than asset sales, which would mean “our new operators will not have to rely on the capital markets.”
And the REIT executives also said that they have seen M&A activity pick up recently and expect to remain active, as they have been executing the restructuring deals.
The Stifel analysts are not anticipating acquisition activity, though, given “aggressive” pricing, higher interest rates and Omega’s $500 million share buyback program, of which $358 million remains to be utilized.
PHE ending ‘not particularly ideal’
Krull said the impending end of the Public Health Emergency on May 11 is not particularly ideal, given some of the benefits that it provided to the long term care industry.
The three-day stay waiver was particularly useful to the long-term care industry, which Krull said is still deeply “entrenched” in the post pandemic recovery phase.
“This waiver was a huge benefit to the industry during the height of the pandemic, as the reimbursement associated with the ability to scale in place helped to offset some of the increased costs connected with managing COVID outbreaks,” she said.
The other major benefit to the industry, she said, was the continuation of the enhanced 6.2% FMAP add-on, which was delinked from the PHE as a result of the Consolidated Appropriations Act of 2023, which passed in late 2022. The act phased down the add-on from 6.2% in the first quarter to 5% in the second quarter, 2.5% in the third quarter and down to 1.5% in the fourth quarter with no add-on provided after 2023.
“It is too soon to tell what the impact of those reductions will have on the FMAP rate add-on that certain states like Texas had been providing skilled nursing providers in terms of recovery,” she said.
Krull said Omega is keeping a close eye on Medicaid rate setting, particularly in states like Texas and Ohio, where they were encouraged by the announcement of payouts from the American Rescue Act.
“Our hope is that as we exit the PHE and the enhanced FMAP winds down, that states in particular will set rates on pace with inflation or an excess thereof if they have not already, and that the federal government will not make any hasty moves to provide for unfunded [staffing] mandates,” she said.
While occupancy is continuing to slowly rebound, not unexpectedly, the recovery has tapered off slightly in these winter months. Occupancy is slowly rebounding but a winter slowdown is occurring, she observed. Still, 31% of core facilities have now recovered from an occupancy perspective, up from 29% in the second quarter.
Companies featured in this article:
Centers for Medicare & Medicaid Services, Omega Healthcare Investors
