Following its first quarter earnings release, executives at Omega Healthcare Investors Inc. (NYSE: OHI) said Wednesday that new investments along with restructuring of existing deals will result in gains.
This is in part due to rent deferrals ending on some of Omega’s properties and operating trends continuing to improve for the sector, company leaders said in a conference call.
And while staffing still poses challenges – with executives noting that the federal government’s proposed staffing mandate could be problematic – the pain for the sector is largely bottoming out.
“I’m cautiously optimistic that we’re past the trough. The fact that occupancy is closing at 80% — which is, from our perspective, a pretty good indicator — is important,” said CEO Taylor Pickett during the call. “Minimum staffing could become an issue … But save for that, I don’t see any other clouds on the horizon.”
He added that proposed staffing measures likely will not have an impact because “there are a lot of levers to pull there.”
In the first quarter of 2023, Omega reported adjusted FFO of $160 million, or 66 cents per share, beating consensus estimates by 4 cents per share. For the same period in 2022, the company’s FFO was $184 million, or 74 cents per share.
Also, the Maryland-based real estate investment trust (REIT) reported a revenue of $218.2 million in Q1, beating analyst estimates by $43.06 million.
Reflecting on fourth quarter’s earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) coverage of 1.09 times, Pickett said, “This level of coverage reflects continued occupancy improvement, strong state reimbursement rates and some moderation in the still difficult labor market.”
Also, after a four-month rent deferral, tenant Healthcare Homes began paying full contractual rent on May 1, Pickett said. And, all of the assets related to two operators – representing 2.4% and 2.2% stakes – were fully transitioned to new operators, he said.
“These completed restructurings along with progress related to the LaVie restructuring, provide us with strong momentum in the next few quarters,” Pickett said, referring to funds available for distribution (FAD).
Omega completed $276 million in new investments year-to-date, the company shared earlier. These investments are expected to produce incremental FAD of approximately $2.8 million in the second quarter and $3.4 million of FAD in the third quarter, or almost $0.01 to $0.02 of incremental FAD, CFO Bob Stephenson said.
“In short, although we are not yet providing full year guidance, we anticipate we will return to a FAD payout ratio under 100% in Q3 with a path to return to a normalized payout ratio in the high 80s to low 90s in 2024,” Stephenson noted.
Investors appeared bullish in light of the most recent results, with shares in Omega up 9.38% as the market closed on Wednesday.
Occupancy starting to recover
Occupancy is beginning to improve again after tapering towards the end of 2022 for Omega, but the turnaround is being stunted by staffing woes, said Megan Krull, senior VP of operations. Still, Omega is seeing more of an increase in SNF occupancy than in senior housing occupancy, although both are trending positively.
“[In] 2023, we have seen the return to slow, but steady occupancy increases. The number of core facilities now recovered from an occupancy perspective is 33%, up slightly from the 31% reported in the third quarter,” said Krull. A quarter of Omega’s core facilities have not yet fully recovered, while some are at or above 84% occupancy, she said.
Omega is watching for changes to Medicaid reimbursement rates as funding buffers related to the public health emergency (PHE) come to an end on May 11, and the Federal Medical Assistance Percentage (FMAP) is of particular interest.
“We continue to closely monitor Medicaid rate setting in light of the wind down of the FMAP add-on through year end,” said Krull.
“Specifically, we are paying close attention to Texas and Florida,” she said, adding that as the rates are settled in the coming weeks, Omega is “cautiously optimistic” given the trend of rate increases seen in other states.
Certain states are favorable for rate reimbursements, including Michigan, which is one of Omega’s top five states, Krull said.
“We’re hoping for a moderate to good rate increase this year [in Michigan],” she said, noting Ohio, North Carolina and Virginia are “very strong states” right now.
Still, staffing is presenting problems, Krull said, and more so in certain regions than others, with SNFs’ ability to accept referrals from hospitals being impaired.
According to financial analysts, hospitals are seeing an increase in inpatient volume growth in 2023, which would normally translate into greater post-acute volumes for SNF operators. However, whether this is turning into gains for post-acute occupancy gains at Omega’s SNFs remains to be seen.
“We don’t know that play yet. We’re not seeing that increase in the quality mix related to that,” Krull said. “But I will say, we’re still dealing with some staffing issues out there that are preventing people from taking new residents on. So that is causing a bit of an issue still.”
Staffing ‘not out of the woods’
The Centers for Medicare & Medicaid Services (CMS) is expected to release its proposed staffing mandate this spring, which has had operators on edge as they recover from pandemic-era headwinds.
“While the sector has clearly not recovered from a staffing perspective, we continue to hear about positive momentum from our operators with certain markets better off than others,” Krull said.
An area of improvement on this front has been expenses related to agency use, which for Omega’s core portfolio, decreased. Agency expenses on a per patient day basis for the fourth quarter of 2022 decreased to five times where it was in 2019 versus six times last quarter, she said.
“This is not to say that the industry is out of the woods just yet, but certainly, any move in the right direction is welcome, especially on the heels of the announcement of the end of the public health emergency,” Krull said.
The American Health Care Association (AHCA) reports that upwards of 70% of facilities currently do not meet the 4.1 hour per patient day staffing level that CMS previously recommended. “[R]equiring that level of staffing seems unlikely as a final outcome,” Krull said.
Krull also said that CMS could make its proposed measures less ‘draconian’ by pulling some levers.
“For instance, a tier system could be set with a level for basic care and one for exceptional care,” she said. “Or similar to what Florida did last year, the requirement could be set to include staff outside of just RNs, LPNs and CNAs. Whatever gets implemented could also be delayed until the industry has fully recovered from a staffing perspective, or could be rolled out over several years.”
And moreover, CMS should consider funding for a staffing mandate before implementing it, she said.
“[We] implore CMS to recognize that imposing any sort of draconian unfunded mandate at the height of a post-pandemic recovery, when the staffing doesn’t even exist and the majority of facilities not only don’t meet, but can’t meet such requirements under the circumstances, is far from a solution, but rather a problem in and of itself,” Krull said.
Investment pipeline
Omega executives also addressed its recent investments, generally sharing details of some of the terms and the properties mix between skilled nursing and assisted-living of its newer acquisitions.
“We certainly have seen our pipeline pick up. It’s mostly SNF assets,” said Pickett. “It’s both in the U.S. and the U.K. We’re now quoting cap rates north of 9%.”
As for whether the REIT is seeing a pull back from private capital competitors active in the SNF acquisition market over the past few years, Pickett said: “[We] don’t directly compete with some of these private folks … we have seen that get quiet as of the last few quarters.”
Omega’s recent acquisitions in West Virginia, Pickett said, reflect that location matters as the company eyes markets favorable for Medicaid rates as well as for operating trends in each region.
“Reimbursement is strong [and] the West Virginia supply is relatively low. So the supply-demand economics are strong,” Pickett said. “And it’s with an operator we have a great relationship with who has excellent coverage today. So you throw those three factors together, it’s a pretty good underwriting asset deal for us,” he said.
And Omega is planning to do more transactions, he said, although he is not sure if the current pace will be sustained, which would bring the 2023 total to around $600 million.
[If] you look at the $276 million that we’ve allocated now, the pipeline is active. It’s really driven a little bit by just returns to yields,” said Pickett, adding, “We’re quoting north of [9%] on all of our deals, and we’re seeing SNFs deals at [10%] and deals at [12%] and at those levels, we can make the math work. So, we’ve opened the pipeline up, and I think we’ll see more opportunities as it becomes clearer in the marketplace that a lot of traditional financing sources just aren’t available.”
Ongoing restructuring
Omega’s LaVie Care Center properties have been undergoing restructuring, and executives said LaVie is expected to show improvement.
“The occupancy for LaVie is ever so slightly higher than the median. It’s a little bit above 80%. It’s too early to quantify what we’re looking at in terms of rent. We’re looking at both sales and re-leases,” said Omega’s COO, Dan Booth. “I feel confident that will happen. The exact dollars that we receive it’s just a little too early to predict at this point in time. But I do see the material upside from what we’ve been reporting in the first quarter.”
Omega leadership plans to sell additional LaVie properties in the coming months as part of a restructuring plan for the portfolio. Restructuring will also result in “at least” several months of partially deferred rent, according to a recent update.
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.
Companies featured in this article:
Healthcare Homes, LaVie Care Center, Omega Healthcare Investors
