Omega Healthcare Investors (NYSE: OHI) has sold 29 LaVie facilities for gross proceeds of $305 million. This Nov. 1, 2023, sale marked a substantial reduction in Omega’s exposure to LaVie assets, decreasing associated risk, CEO Taylor Pickett said Friday during the company’s Q3 2023 earnings call.
Also on the call, leaders with Omega commented on the REIT’s plans following the industry exit of Guardian Healthcare. Guardian’s decision to exit came as “quite a surprise” to Omega leaders, said COO Dan Booth. But the Guardian situation is “really idiosyncratic” and should not be taken as the beginning of a wave of exits, Pickett said.
“Guardian is currently in discussions with Omega regarding the facilities in its portfolio. We continue to operate our other facilities, and our teams are focused on delivering quality patient care and services in all of Guardian’s facilities,” the company said in a statement emailed to Skilled Nursing News.
Pickett also touted that Omega’s third quarter financial performance exceeded expectations on higher-than-expected interest income and unanticipated rent payments from some operators on a cash-basis.
The company’s adjusted funds from operations (FFO) per share of $0.71 beat analysts’ consensus estimates.
“SNF operator fundamentals are improving due to stronger Medicare and Medicaid rates, higher occupancy and less agency labor utilization,” Stifel analysts commented in a note on the earnings. “While there will always be tenant issues (in the best and worst of times), we believe the bulk of the issues are behind us.”
The Stifel team also noted that with capital markets “constrained,” real estate investment trusts such as Omega are among the few buyers positioned to make acquisitions. And Omega’s leadership said they are ready to do so from a financial perspective.
“With over $600 million of cash on hand as of November 1st and over $1.4 billion available under our line of credit at the end of the quarter, we are well-positioned to fund both the pipeline and future debt obligations,” Pickett said.
The LaVie portfolio
One of the central themes of the call was the transformation of Omega’s LaVie portfolio, through the sale and transition of a number of facilities.
In total, 48 facilities have transitioned out of the LaVie portfolio through the course of Omega’s restructuring efforts. These transitions included outright asset sales and re-tenanting agreements, effectively streamlining the portfolio.
Following the recent sale of the 29 facilities, Omega anticipates transitioning another six. This would leave Omega with 31 LaVie properties, located in North Carolina, Virginia, Pennsylvania, Mississippi and Florida.
These are “extremely strong states,” and the LaVie portfolio going forward should generate “an enormous amount of cash flow, supporting a lot of rent,” Pickett said.
However, Omega is “still chopping the wood” to complete the portfolio restructuring and the exact timing remains in question, he added.
The remaining LaVie portfolio is now expected to perform well, company officials said, providing cash flows that cover more than 1.0x EBITDAR.
Guardian’s exit from the industry
Guardian had previously entered into a restructuring agreement with Omega, resulting in the sale of 12 facilities, eight in Pennsylvania and four in Ohio. These actions were aimed at stabilizing its financial position, Pickett said.
In May 2022, Guardian resumed making full contractual rent and interest payments on its remaining portfolio of 16 facilities, signaling a potential turnaround. However, the company departed from this trajectory and ceased making its contractual rent payments in Q3, which amounted to approximately $1.5 million per month. In response, Omega has been using Guardian’s $7.3 million security deposit to cover rent payments.
With the security deposit expected to be substantially depleted after applying full contractual rent until December of the current year, Pickett said they are addressing the situation.
“Since becoming aware of this situation, Omega has sought to re-tenant the remaining six facilities with the goal of concluding the transitions by year-end,” Pickett said. “At this point, Omega is in discussions with a potential new tenant with the goal of a year-end close, subject to the normal due diligence, satisfactory documentation and regulatory approvals.”
While the decision to exit the skilled nursing sector did surprise Omega’s leadership, Booth pointed to the struggles that the chain has faced.
“They’ve been struggling as of late,” he said. “They had deep liquidity issues and they’ve decided to exit, and we’re looking to replace them as operators.”
Omega has many operator relationships in Guardian’s markets of Pennsylvania and West Virginia, and the REIT is currently in the process of determining the right team to transition in, Pickett said.
Labor, occupancy, and the impact of the staffing mandate
The labor shortage issue has been a persistent challenge for the skilled nursing industry, Megan Krull, Senior Vice President of Operations at Omega, said during the earnings call.
While the sector has shown signs of improvement, the effects remain far from uniform. Some facilities have managed to recover from the lows experienced during the height of the pandemic, while others continue to grapple with staffing deficits.
Florida, for instance, remains a region with substantial staffing challenges, which have hindered the recovery of occupancy rates. These disparities emphasize that labor challenges are far from resolved and continue to impact the sector’s ability to provide care and support to residents.
Occupancy rates have been on a slow path to recovery within the Omega portfolio, she said. The recovery has been uneven, with significant regional variations. Facilities in areas with acute staffing shortages have found it more challenging to regain pre-pandemic occupancy levels. Krull pointed out that 26% of core facilities with not yet fully recovered occupancy are still at or above 84% occupancy.
“From an occupancy perspective, the slow positive trends have continued with the number of core facilities now recovered at 37%, up slightly from the 35% reported in the first quarter,” she said. “Additionally, 26% of core facilities that have not yet fully recovered are at or above 84% occupancy. While the staffing shortage situation continues to ease slowly, there’s still large variation by market and occupancy is still believed to be impacted.”
Another significant factor looming over the skilled nursing sector is the impending staffing mandate proposed by the Centers for Medicare & Medicaid Services (CMS), Krull said.
She noted that while the proposed staffing mandates include delayed implementation, they present complex challenges for the industry.
These requirements, which are not yet funded, create uncertainty about their realistic achievement and the financial burden they may impose on facilities, she said. CMS is currently in the comment period for these mandates, with the outcome still uncertain.
“We’re just waiting to see what ends up coming out of it,” she said. “But certainly, the rural areas are going to be hit a little bit harder than the urban areas once it does kick in. In terms of rate setting, again, none of these rates are impacted by the staffing mandate at this point but we do watch especially our top 10 states really carefully and have seen positive things over the last several months.”