Omega Healthcare Investors’ (NYSE: OHI) robust financial results for the second quarter rested on better occupancy levels, higher state reimbursements and improvements in the labor market even though use of agency workers still remains high, company executives said on Thursday.
During its second quarter conference call, the Maryland-based real estate investment trust (REIT) also reported substantial investments in the skilled nursing sector in West Virginia as well as successful debt repayment, and shared plans to continue funding its pipeline and restructuring efforts.
“The second quarter new investments, the majority of which were completed in April, are expected to produce incremental contractual rent and interest, or FAD, approximately $1.3 million in the third quarter,” Bob Stephenson, Omega’s CFO, said.
And while staffing levels are generally improving, the trend varies regionally, Omega executives noted.
“Florida tends to be one of the states experiencing severe staffing shortages. So it really just depends on where you are,” Omega CEO Taylor Pickett said. “And in terms of occupancy, we always talk about that national 4%, getting back up close to there, and we will close that 80%. However, with [agency labor] still high we need to work through some of the staffing issues.”
During the second quarter, Omega reported adjusted funds from operations (FFO) per share of 74 cents, beating analyst estimates of 68 cents.
“The main difference between actual results and our estimate was higher-than-expected rental revenue,” Stifel analysts said. Nevertheless, rental revenue was partially offset by more-than-anticipated general and administrative expenses and interest, even though use of agency labor improved during the quarter, the analysts said. “While we expected additional rent from restructurings, cash rent payments were stronger than anticipated.” This was especially true of Omega’s LaVie operations.
Dan Booth, Omega’s COO, said Omega and LaVie are in the midst of restructuring their portfolio by transitioning certain underperforming facilities, mostly based in Florida. Currently, 13 facilities have been divested while Omega is in the process of selling or releasing an additional 23 facilities, most of which are expected to be transferred throughout the fourth quarter of 2023, he said.
Analysts remain bullish about Omega’s performance going forward as a bulk of the restructuring is complete and fundamentals for the SNF sector continue to improve due to stronger Medicare and Medicaid rates, higher occupancy levels and less use of agency labor, they said.
“What OHI is dealing with now is the finalization of deals,” Stifel analysts said, “To us, this signals a turning point in the operating cycle towards recovery away from decline.”
Completion $270 Million in New Investments in Q2
The company announced investments totaling $270 million, which included $128.5 million in real property acquisitions, $82.3 million in real estate loans receivable, and $41.7 million in other investments. Executives said these strategic transactions underscore the company’s commitment to providing high-quality healthcare facilities for seniors and bolstering shareholder value.
“Our strategic acquisitions and loans reflect our confidence in the long-term potential of this sector and our commitment to meeting the evolving needs of the aging population,” Pickett said.
One notable transaction involved the acquisition of four skilled nursing facilities (SNFs) in West Virginia for $114.8 million. These SNFs were leased to an existing operator and added to the master lease of the operator, offering an initial annual cash yield of 9.5% and annual escalators of 2.5%.
“Concurrently with these acquisitions, Omega amended an existing operator’s master lease to include the four facilities with an initial cash yield of 9.5% and two and a half percent annual escalators,” he said.
Omega provided an additional loan of $104.6 million to the operator. This loan was aimed to support the operator’s purchase of 13 additional SNFs in West Virginia.
‘Continued improvement’ with occupancy increasing and labor market improvements
Omega also announced the successful repayment of a $350 million debt maturity. On August 1, 2023, the company repaid its $350 million 4.375% senior notes that had matured, utilizing available cash balances. Pickett said the company’s prudent financial management and strong cash reserves facilitated this debt repayment, further solidifying its financial stability.
Despite a decrease in net income to $61.5 million compared to $92 million in the same period in 2022, the company highlighted several positive indicators.
Revenues reached $250.2 million, a $5.5 million increase over the same period in the previous year. The company attributed this growth to improved operator restructurings, transitions, and revenue from recent investments.
“While we had expected a strong sequential improvement in FAD, as some restructured operators returned to paying rent, this was augmented by unanticipated additional rent payments from some operators on a cash basis,” Pickett said.
Pickett also noted the positive trend in operational improvement and the growth of the acquisition pipeline.
“The operating backdrop continues to improve, with occupancy increasing and the tight labor market slowly moderating,” he said. “As a result, EBITDAR coverage, excluding CARES Act support, for the first quarter of 2023 ticked up to 1.15x, its highest level in 3 years. At the same time, the acquisition pipeline continues to improve, with the team closing $270 million of transactions in the quarter.”
Maplewood short-payment
Among Omega’s operational updates, the REIT addressed its dealings with Maplewood Senior Living, a17-community portfolio.
“We are currently working with Maplewood and the estate of Greg Smith to address these shortfalls based on Maplewood’s latest cash flow projections, which incorporate anticipated January rate increases,” executives said in the conference call.
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