As Omega Healthcare Investors Inc. (NYSE: OHI) advanced on its restructuring efforts at 2023’s end, company executives said that they were finally able to have a better grasp on their outlook for 2024. And, while the company’s current fundamentals were looking strong, the looming federal staffing mandate might obscure the path forward for the sector as a whole.
The insight on restructuring was backed by good news on other fronts for Omega. But the news that the federal government intends to finalize a nursing home staffing mandate this year is a concern for the sector, the company’s leadership acknowledged. Still, they emphasized that the effects of the mandate as currently written would not be felt in the short term.
The Maryland-based real estate investment trust (REIT) saw an encouraging occupancy recovery, although one slowed by staffing shortages that hadn’t uniformly improved across its operations, executives shared Thursday during the company’s fourth quarter earnings call. And while use of agency labor was on a downward trend, this too was variable market.
“We have enough visibility into the timing and ultimate resolution of the portfolios that are being transitioned or sold to provide guidance for the first time since the pandemic started,” said Taylor Pickett, CEO of Omega. “Our 2024 [adjusted] FFO guidance is between $2.70 and $2.80 per share.”
During the fourth quarter of 2023, the REIT’s earnings and revenue fell from the previous quarter as operators were still in the process of being restructured, and Pickett said going forward the restructuring will bear some impact.
“We anticipate our 2024 first and second quarter earnings to continue to be impacted by these restructuring efforts, although we expect earnings will improve as the year progresses and our operator issues are resolved,” said Pickett.
However, Pickett expects a “timely completion” of various operator restructurings, which includes LaVie and Guardian portfolios. “We’re assuming $94 million dollars in asset sales related to the facilities classified as held for sale as of year end.”
For the fourth quarter of 2024, Omega reported an adjusted FFO per share of 68 cents, beating the Wall Street consensus estimate of 66 cents. However, some analysts had expected the company to report better results based on views of higher proceeds from rent and completion of restructuring.
“The miss relative to our estimates was driven by bad debt expense and our overly optimistic assumption that the LaVie portfolio restructuring would be complete and that the tenant would start paying significant rent in 4Q23,” analysts for Stifel shared in an investment note.
Omega posted a fourth quarter revenue of $239.3 million compared to a year ago’s $144.8 million, beating expectations of $206.6 million. The latest quarter’s revenue was slightly down compared to $242.0 million in the third quarter.
At the end of regular trading on Thursday, Omega shares were up 6.48%.
Dispositions, restructuring and transitions
Overall, during the fourth quarter, Omega sold 32 facilities for $324 million, while during the full year of 2023, the REIT sold 69 facilities for $485 million, COO Daniel Booth said.
As for skilled nursing facilities (SNFs), Omega continued to reduce its holdings in its LaVie portfolio in the last quarter, with the fate of the remainder of these assets still in discussions.
The REIT sold three LaVie facilities in Florida for $317.9 million of gross proceeds during the quarter, Booth said. Now, Omega’s remaining portfolio with LaVie consists of 30 SNFs, which include 13 facilities in North Carolina, 9 in Pennsylvania, six in Mississippi, and two in Virginia.
“Three of those four states are considered highly desirable from an operating environment standpoint,” Booth said, adding, “There are currently ongoing discussions with LaVie on the best overall future for each of these remaining 30 facilities.”
This news comes after Omega substantially reduced its exposure to LaVie assets by selling 29 facilities for gross proceeds of $305 million in the third quarter of 2023. LaVie has paid approximately $1.45 million per month for the last three months including January of 2024, he said.
Meanwhile, Omega is also currently in the process of transitioning six additional facilities in Louisiana and two in Florida to third party operators, he said.
As for Omega’s Guardian assets, Omega executives have identified a likely “transition partner” with whom the company is currently working and will likely name in the second quarter.
Staffing shortages, occupancy and potential impact of mandate
Occupancy levels for the REIT’s facilities have improved year-over-year, Omega executives shared. However, occupancy is being suppressed by ongoing staffing pressures in the near term. And although the labor situation has improved with agency use down, the easing varies by market.
“Occupancy for our overall core portfolio has continued to recover from a low of 74.6% in January of 2022 to 80.2% as of mid-January 2024, based upon preliminary reporting from our operators,” Booth noted. As a comparison, occupancy for Omega’s core portfolio stood at 83.2% for the fourth quarter of 2019, just prior to the onset of the COVID pandemic.
As for the looming staffing mandate that has preoccupied organizations in the nursing home sector, executives said that while they expect that the mandate may be finalized in the summer, it will bear down on the sector and have impacts in the long term, especially if left unfunded. That said, they expressed optimism that it may get defeated, or at the very least, watered down. Either way, Omega executives don’t expect the mandate to have any impact in 2024 since its stipulations aren’t expected to go into effect until several years later.
“With the staffing shortages easing, we see occupancy continuing to slowly improve,” said Megan Krull, senior VP of operations. For about 42% of Omega facilities, occupancy grew, while even for the 22% that did not show recovery, occupancy stood at 84%, she said.
“Overshadowing these improvements, however, is the promise by [the Centers for Medicaid & Medicare] that they will finalize the staffing mandate sometime this year,” Krull said.
Advocacy efforts by the American Health Care Association are, nevertheless, leading to hope for a more measured approach to staffing regulation, Krull said.
“With AHCA’s strong track record on getting improvements made to proposed rules, and more than 40,000 comments received by CMS, all of which need to be reviewed and considered, it is too soon to tell what the ultimate mandate will look like. We can only hope that reasonable minds will prevail, and then any final mandate will be well balanced,” she said, adding that it could be “blocked” eventually given the strong bipartisan efforts to do so.
New investments
Executives also highlighted the company’s financial performance, showcasing its $440 million in cash on the balance sheet and $1.4 billion in credit facility capacity.
Moreover, during the fourth quarter, Omega completed a total of $249 million in new investments, consisting of $167 million in real estate loans, other loans $51 million in real estate acquisitions and $31 million in capital expenditures, Booth said. The new loans have a weighted average interest rate of 10.5%.
During fiscal 2023, Omega made new investments totaling $667 million including $84 million in capital expenditures. Subsequent to year end 2023, Omega has closed on $27 million in new mortgage loans.
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