Omega Healthcare Investors, Inc. (NYSE:OHI) Q3 2023 Earnings Call Transcript

Omega Healthcare Investors, Inc. (NYSE:OHI) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Greetings and welcome to the Omega Healthcare Investors Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Michele Reber. You may begin.

Michele Reber: Thank you and good morning. With me today is Omega’s CEO, Taylor Pickett; COO, Dan Booth; CFO, Bob Stephenson; and Megan Krull, Senior Vice President of Operations. Comments made during this conference call that are not historical facts may be forward-looking statements such as statements regarding our financial projections, dividend policy, portfolio restructurings, rent payments, financial condition or prospects of our operators, contemplated acquisitions, decisions or transitions and our business and portfolio outlook generally. These forward-looking statements involve risks and uncertainties which may cause actual results to differ materially. Please see our press releases and our filings with the Securities and Exchange Commission, including, without limitation, our most recent report on Form 10-K which identify specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

During the call today, we will refer to some non-GAAP financial measures, such as NAREIT FFO, adjusted FFO, FAD and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under generally accepted accounting principles as well as an explanation of the usefulness of the non-GAAP measures are available under the Financial Information section of our website at www.omegahealthcare.com and in the case of NAREIT FFO and adjusted FFO and in our recently issued press release. In addition, certain operator coverage and financial information that we discuss is based on data provided by our operators that has not been independently verified by Omega. I will now turn the call over to Taylor.

Taylor Pickett: Thanks, Michele. Good morning and thank you for joining our third quarter 2023 earnings conference call. Today, I will discuss our third quarter financial results and certain key operating trends. The third quarter FAD, funds available for distribution of $0.68 per share was better than expected, modestly exceeding our $0.67 per share dividend. The FAD dividend payout ratio is 99%. The decrease in FAD from the second quarter is due to the reduced rent from cash basis operators with Levi as expected, paying $9 million less in cash rent in the third quarter compared to the second quarter. The November 1 Levi asset sales have significantly reduced our Levi exposure. The remaining Levi portfolio is expected to cover above 1.0x.

And therefore, Levi should no longer be in the below 1.0x EBITDAR coverage bucket going forward. We continue to have a handful of cash-basis operators, including Maplewood that will impact our go-forward AFFO and FAD making fourth quarter 2023 and first quarter 2024 FAD difficult to predict. However, longer term, we believe all of these assets but in particular, Maplewood are well positioned to generate reliable and growing cash flows and related rent. Turning to the under 1.0x EBITDAR coverage operators which represent 27.5% of total rent. We can break the 27.5% into a handful of buckets. Operators representing 6.2% of the 27.5% are sitting on extremely strong balance sheets and therefore, payment of rent should not be an issue. Operators representing 6.2% have second quarter EBITDAR coverage above 1.0x and operators representing 1.3% are benefiting from July state rate increases that have resulted in above 1.0x coverage on a go-forward basis.

8.4% represents Levi which I have already discussed. Represents one operator that has already transitioned to a performing credit. That leaves operators representing 4.1%, of which operators representing 1.2% and are in active restructurings where were recently transitioned which leaves a balance of 2.9%, representing 8 small operating relationships. I will now turn the call over to Bob.

Bob Stephenson: Thanks, Taylor and good morning. Turning to our financials for the third quarter. Revenue for the third quarter was $242 million, before adjusting for certain nonrecurring items compared to $239 million for the third quarter of 2022. The year-over-year increase is primarily the result of timing related to operator restructurings revenue from new investments completed in 2022 and ’23 and short-term investment income, partially offset by asset sales completed during that same time period. Our NAREIT FFO and for the third quarter was $161 million or $0.63 per share as compared to $159 million or $0.65 per share for the third quarter of 2022. Our adjusted FFO was $182 million or $0.71 per share for the quarter and our FAD was $174 million or $0.68 per share and both exclude several items consistent with historical practices and outlined in our NAREIT FFO, adjusted FFO and FAD reconciliations to net income found in our earnings release, as well as our third quarter financial supplemental posted to our website.

Our $0.68 of FAD was $0.02 less than our second quarter FAD of $0.70. As Taylor mentioned, the $0.02 decrease compared to the second quarter was primarily the result of Levi, cash-based operators and the impact of additional weighted average shares, partially offset by the incremental short-term investment income. Our fourth quarter FAD will be impacted by a number of items, including the timing of payments received from cash-based operators and the availability of security deposits. The full quarterly impact of rent and interest on new investments. The third quarter repayment of the $105 million seller’s note and other asset sales, restructurings, or re-leasing of a few small cash-based portfolios, short term or overnight interest income earned on balance sheet cash.

Interest expense related to the term loan, offset by bond and HUD repayments and the weighted average shares outstanding impacted by potential equity issuances. Turning to the balance sheet. This is another quarter where we continued to strengthen our liquidity, capital stack, maturity ladder and help protect our overall cost of debt. We started the quarter with approximately $350 million of cash on the balance sheet. During the quarter, in addition to paying our $0.67 dividend and making regular bond interest payments, we paid off a $350 million bond that matured in August. We entered into a $428.5 million term loan that has a 2-year maturity with two 1-year extensions at our option effectively a 4-year term loan. We swapped the term loan rate from floating to fixed at just under 5.6%.

And lastly, we issued 4 million shares or $126 million of equity to continue to delever. In total, we ended the quarter with over $550 million of cash on the balance sheet. 99% of our $5.3 billion in debt was at fixed rates and our net funded debt to annualized adjusted normalized EBITDA was 5.01x and our fixed charge coverage ratio was 4.0x. Looking forward, based on the current capital markets, our pipeline and at April 1, 2024, $400 million bond maturity, we expect to continue to be opportunistic in the equity market, while targeting leverage below 5x. In summary, consistent with the commentary provided last quarter, we still expect our fourth quarter FAD per share to approximate our $0.67 dividend. However, as Taylor mentioned, it’s hard to predict given the number of items I’ve laid out that may impact FAD.

I will now turn the call over to Dan.

Dan Booth: Thanks, Bob and good morning, everyone. As of September 30, 2023, Omega had an operating asset portfolio of 883 facilities with approximately 86,000 operating beds. These facilities were spread across 65 third-party operators and located within 42 states and the United Kingdom. Trailing 12-month operator EBITDAR coverage for our core portfolio as of June 30, 2023, increased to 1.15x and versus 1.1x for the trailing 12-month period ended March 31, 2023. During the second quarter of 2023, our operators cumulatively recorded approximately $13.2 million in federal stimulus funds as compared to approximately $5.8 million recorded during the first quarter. Trailing 12-month operator EBITDAR coverage would have increased during the second quarter of 2023 and to 1.07x as compared to 1.02x for the first quarter when excluding the benefit of any federal stimulus funds.

EBITDAR coverage for the stand-alone quarter ended June 30, 2023, for our core portfolio was 1.21x, including federal stimulus and 1.15x, excluding the $13.2 million of federal stimulus funds. This compares favorably to the stand-alone first quarter of 1.18x and 1.15x with and without the $5.8 million in federal stimulus funds, respectively. Occupancy for our overall core portfolio has continued to recover from a low of 74.6% in January of 2022, mostly located in the state of Florida. During the course of the restructure, Omega has transitioned 48 facilities, 46 through outright asset sales and through re-tenanting [ph], including 29 facilities that were sold on November 1, 2023, for gross proceeds of $305 million. We are now down to six remaining transition facilities, including two in Florida and four in Louisiana which we are hopeful to transition in the near term.

Post these recent sales and in anticipation of closing our six remaining transition facilities, Omega’s portfolio with Levi will include a total of 31 facilities which include facilities in North Carolina, two in Virginia, nine in Pennsylvania, six in Mississippi and one in Florida. During the third quarter and for the month of October of 2023, Levi paid partial rent of approximately $2.5 million per month. Maplewood, in the third quarter and for the month of October of 2023, Maplewood continue to shortpay its contractual rent by $1 million per month. We currently are working with Maplewood and the estate of Greg Smith to address these shortfalls. In anticipation of January 2024 rate increases and improved occupancy at the second Abe facility in Manhattan, Maplewood believes there is a pathway forward to meet its full contractual rental obligations.

However, the timing at this point is unknown. To date, including October, we have applied $4 million of the $4.8 million security deposit to cover the rent shortfalls. Guardian, on Omega’s first quarter 2022 earnings call, Omega announced that we had entered into a restructuring agreement with Guardian Healthcare after agreeing to sell 12 facilities, eight Pennsylvania and four in Ohio. And successfully releasing eight facilities, all located in Pennsylvania. In May of 2022, Guardian resumed making full contractual rent and interest payments on its remaining portfolio of 16 facilities. Subsequently, in May of 2023, Omega sold 10 additional Guardian facilities, leaving only six remaining facilities, one in West Virginia and five in Pennsylvania.

Recently, in the third quarter of 2023, Guardian informed Omega that they intend to exit the nursing home industry entirely and needed to transition the remaining facilities with Omega. At that time, Guardian ceased making its contractual rent payment of approximately $1.5 million per month. Since that time, Omega has been using Guardian’s $7.3 million security deposit to cover rent. The security deposit will be substantially depleted after applying full contractual rent to December of this year. 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. 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.

In addition to the aforementioned restructurings and transitions, Omega is working with several other relatively small operators on various restructurings. Turning to new investments. On August 29, 2023, Omega closed on a sale lease transaction for one facility in Virginia for $16 million. The facility was added to an existing operator’s master lease with a national cash yield of 10% with 2% annual escalators. On September 8, 2023, Omega closed on a $40 million sale-leaseback transaction for 14 care homes in the U.K. concurrently with the acquisition, Omega entered into a master lease for the care homes with a new operator with an initial cash yield of 10.2% with 2.5% annual escalators. Subsequent to the third quarter, Omega closed on two additional transactions.

Specifically, on October 2, 2023, Omega provided $38 million in mortgage loans to a new operator to purchase two assisted living facilities in Pennsylvania. The loan spares a blended interest rate of 9.3% and have terms that range from 3 to 5 years. Additionally, on October 2 of 2023, Omega closed on a purchase lease transaction for one facility in Maryland for $22.5 million. The facility was added to an existing operator’s master lease with a national yield of 10% with 2.5% annual escalators. During the third quarter, Omega closed on a total of $106 million in new investments, including $24 million in capital expenditures. As of September 30, 2023, Omega has closed on $418 million of new investments, including $53 million in capital expenditures.

Turning to dispositions. During the third quarter of 2023, Omega received $99 million in proceeds related to facility sales. As of September 30, 2023, Omega has divested 27 facilities for a total of $161 million in gross proceeds and as previously mentioned, on November 1, 2023, Omega sold 29 Levi facilities for total gross proceeds of $305 million. I will now turn the call over to Megan.

Megan Krull: Thanks, Dan and good morning, everyone. 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. 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. As noted last quarter, in June, ACA released the results of a survey of 425 nursing home providers results of which showed that 52% are still limiting new admissions due to staffing shortages. Agency expense on a per patient day basis for our core portfolio for second quarter 2023, dropped to 4x where it was in 2019 in comparison to the 5x we reported last quarter.

Despite the continued staffing limitations in the industry, as expected, CMS move forward releasing a proposed staffing mandate on September 6. And while it was not as onerous as it was believed it might be, it is certainly not palatable given the current state of play. Included in the proposal is a requirement for an RN to be on-site 24/7, along with required RN hours per resident day of 0.55 and required nursing aid hours per resident day of 2.45. And while the 24/7 RN requirement is a 2-year delayed implementation for urban facilities, 3 years for rural and the required hours per resident day for RNs and nursing aids is a delayed implementation of 3 years for urban facilities 5-year for rural. With the industry still in flux post pandemic, predicting out where the state of staffing will be at that time is difficult at best.

The comment period for this proposal is open through November 6 and ACA has been bringing to light some of the difficulties of the proposed mandate, most importantly, the fact that it is currently unfunded. While it is too soon to tell what the ultimate outcome of this proposal will be, we hope that if a final mandate is indeed imposed that CMS will hear the voices of the industry and implement a fair, balanced mandate that is realistically achievable by whatever delayed time frame is ultimately set. I will now open the call up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Jonathan Hughes with Raymond James.

Jonathan Hughes: Could you share some more details or background on what happened at Guardian and their decision to exit the skilled nursing business? I recall they had — I think some issues last year and they were restructured. It seems like maybe operations got better and then worse. Is it may be a real estate issue there with that portfolio rather than an operator issue? Just any color that would be great.

Dan Booth: Yes. The — we’ve gone through a couple of repeat structures with Guardian over the last couple of years, the — their decision to exit the industry in its entirety was quite a surprise. I think it’s a mirror out of issues. But I think that the management there is decided to exit the business, quite frankly. They’ve got a lot more facilities than just ours. But yes, they’ve been struggling as of late. They were — they had deep liquidity issues and they’ve decided to exit and we’re looking to replace them as operators.

Jonathan Hughes: Okay. And then, Taylor, in your prepared remarks, you mentioned like 2.9%, almost 3% of operators are in the sub 1x EBITDAR coverage bucket and I don’t think those have been restructured none individually or that impactful but together they’re almost a top 10 tenant. What’s the expectation for each of those? I understand the amount of strong balance sheets or other businesses to paying with rent but some are actually negative on EBITDAR coverage. I guess should we take a more conservative approach there in terms of rent forward?

Taylor Pickett: I feel pretty comfortable with that profit [ph], Jonathan. It’s — every one of those 8 credits has a slightly different story. But in terms of looking at it as a whole, any type of discount will be minimal. So we’re not particularly worried. And if you look historically, that’s the type of percentage we’ve had in the underwind bucket for many, many years. Typically, those things work themselves out over long periods of time; I expect this to be exactly the same.

Jonathan Hughes: Okay. And then one more for me, if I can sneak one in. What’s the investment pipeline look like today in terms of size and yields and I realize deals take time but when do you think we could see more robust fee simple, so owned versus loans, acquisition activity.

Dan Booth: We could go back years and we could state that the pipeline is choppy. I would say that it’s borderline robust at this point, still choppy. We’re still seeing a lot of deals in the U.K. We’re seeing fair amount of deals in the U.S. again, size is choppy. So I can’t predict what we’re going to see in ’24 at this point but I think it would be similar to what we’ve seen so far in ’23 which we just under, I guess, $0.5 billion in new investments in the year to date.

Operator: Our next question comes from the line of Vikram Malhotra with Mizuho.

Unidentified Analyst: This is Georgi [ph] on for Vikram. Just on Levi and Maplewood, like from a cash flow perspective, how should we think about the range of outcomes in 2024?

Taylor Pickett: So I think for Levi, it’s worth just taking a little half step back at that whole restructured. So to date, the 46 assets that have been sold have generated $515 million of proceeds. The six assets that still need to be transitioned a little bit of wood left to chop for Dan are likely to be sold and we’re looking at a price point north of $40 million. So call it, $55 million, $56 million of sales proceeds from Levi, the two assets that were released were released for $2 million. And then we have the balance that Dan mentioned are in extremely strong states, North Carolina, Virginia, Mississippi, to a lesser extent, Pennsylvania. That will generate on their own an enormous amount of cash flow, supporting a lot of rent.