Omega Healthcare Investors, Inc. (NYSE:OHI) Q4 2022 Earnings Call Transcript February 3, 2023

Operator: Good morning. And welcome to the Omega Healthcare Investors Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Michele Reber. Please go ahead.

Michele Reber: Thank you and good morning. With me today are 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, contemplate acquisitions, dispositions 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, 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 fourth quarter 2022 earnings conference call. Today I will discuss our fourth quarter financial results, operator restructurings and our expectations related to funds available for distribution. Our fourth quarter adjusted FFO is $0.70 per share and funds available for distribution are $0.70 per share. We have maintained our quarterly dividend of $0.67 per share. The dividend payout ratio is 92% of adjusted FFO and 96% of funds available for distribution. As expected, year-to-date FAD of $2.77 per share, exceeded our year-to-date dividend paid of $2.68 per share. Turning to operator restructurings, we have successfully concluded a number of operator restructurings, which have generally resulted in limited or no diminution in longer term funds available for distribution.

Later, Dan will review some of our new and ongoing restructuring activity. As these are in process, the ultimate outcome is difficult to predict. However, based on operator discussions to-date, we believe our first quarter 2023 FAD will be less than our current dividend of $0.67 per share. We believe as these current restructurings are resolved and already completed restructurings, principally at Agemo begin paying restructured rent, we will again return to a FAD run rate in excess of our current dividend. While we remain optimistic regarding the long-term skilled nursing facility industry prospects, we continue to remain cautious in the near-term as our operators contend with staffing issues and occupancy slowly heads back to pre-pandemic levels.

Fortunately, some states have recognized the inflationary pressures facing our operators and have responded with supportive rate increases. We are appreciative and thankful for their support. I will now turn the call over to Bob.

Bob Stephenson: Thank you, Taylor, and good morning. Turning to our financials for the fourth quarter, our NAREIT FFO for the fourth quarter was a loss of $30 million or a loss of $0.13 per share, as compared to $124 million or $0.50 per share for the fourth quarter of 2021. Our adjusted FFO was $177 million or $0.73 per share for the quarter and our FAD was $171 million or $0.70 per share and both excludes several items as outlined in our adjusted FFO and FAD reconciliation to net income found in our earnings release, as well as our fourth quarter financial supplemental posted to our website. Revenue for the fourth quarter was $145 million before adjusting for certain non-recurring items, compared to $250 million for the fourth quarter of 2021.

The year-over-year decrease is primarily the result of incremental write-offs of straight-line accounts receivable and lease inducements in 2022 as a result of placing LaVie, Maplewood and two additional operators on a cash basis for revenue recognition. Consistent with historical practices, the $96 million of straight-line accounts receivable and lease inducements written off in the fourth quarter is excluded from our fourth quarter adjusted FFO and FAD calculations. Our fourth quarter 2022 FAD was flat compared to our third quarter 2022 FAD, as the decrease in cash revenues related to payments made by operators on a cash basis was offset by lower or favorable G&A expense due to the timing of professional services, as well as higher interest income from short-term balance sheet cash investments.

In keeping with previous earnings calls, I will provide revenue, adjusted FFO and FAD commentary on certain operators, including updates on LaVie, Maplewood and Healthcare Homes, which were discussed in our January investor presentation. Dan will provide contractual and operational updates on these operators in his prepared talking points. First, regarding LaVie, in the fourth quarter of 2022, we placed LaVie on a cash basis of revenue recognition, recorded the $24.8 million received for rent in the quarter and wrote-off approximately $58 million of straight-line rent receivables and lease inducements through rental income. On December 30, we sold 11 LaVie facilities to a third-party for a sales price of $130 million, in which we provided $105 million in seller financing.

In January 2023, LaVie paid $2.5 million or 34% in rent pursuant to the deferral agreement and we will only recognize revenue adjusted FFO and FAD in Q1 2023 to the extent cash is received from LaVie. As the LaVie 11 facility sale transaction, which included the $105 million in seller financing did not meet the accounting criteria to be recognized as a sale for GAAP purposes. The assets will remain on our balance sheet and the cash interest payments received on the seller's note will not be included in revenue. However, the cash received will be added back when calculating adjusted FFO and FAD as the loan is paid in arrears. In Q1 2023, we would expect to receive and include approximately $1.4 million in adjusted FFO and FAD. Turning to Maplewood, as a result of our fourth quarter 2022 and first quarter of 2023 negotiations, during the fourth quarter of 2022, we placed Maplewood on a cash basis of revenue recognition.

We recorded $20.2 million received for the fourth quarter rent and interest, and wrote-off approximately $29 million of straight-line rent receivables and lease inducements to rental income. In January 2023, Maplewood paid its full contractual rent of $5.8 million and one month of interest of $1.5 million on our secured revolving credit facility. As Maplewood is on a cash basis, we will only recognize revenue, adjusted FFO and FAD to the extent cash is received. Interest for the remainder of 2023 will be paid-in-kind and excluded from both adjusted FFO and FAD calculations. Agemo, starting in April of 2023, we expect Agemo to resume paying approximately $27.9 million in annual rent and interest, and both adjusted FFO and FAD will be reported as cash is received.

Healthcare Homes, during the fourth quarter of 2022, Healthcare Homes paid all its contractual rent of approximately ?￡5 million. Assuming Healthcare Homes defers all of its Q1 2023 rent and remains on a straight-line basis for revenue recognition, we would include the deferred revenue in NAREIT FFO and adjusted FFO. However, we will only recognize FAD based on cash received. In previous earnings releases and conference calls, we discussed Guardian and an operator representing 3.4% of Q1 2022 annualized contractual rent and mortgage interest. Both operators paid all contractual rent and interest due in the fourth quarter and remain current through January. Also, as discussed in previous calls, an operator representing 2.4% of our Q1 2022 contractual annualized rent and mortgage interest revenue was placed on a cash basis in the second quarter of 2022.

In both the third and fourth quarters, the operator continued to underpay its rents, paying $2.5 million in Q3 and $1.5 million in Q4, which was recorded on a cash basis for both adjusted FFO and FAD purposes. Of the $2 million in January contractual rent owed, $500,000 was collected and we will only recognize revenue, adjusted FFO and FAD in Q1 2023 to the extent cash is received by this operator. Finally, we have previously discussed an operator representing 2.2% of our second quarter 2022 annualized contractual rent and mortgage interest. In the third and fourth quarter of 2022, we recorded $5.5 million and $3.8 million to both adjusted FFO and FAD after application of security deposits. This operator paid $310,000 in rent payments in January.

As the operators on a cash basis and all security deposits have been exhausted, we will only recognize revenue, adjusted FFO and FAD in Q1 2023 to the extent cash is received. Turning to our balance sheet, as highlighted in previous calls, our balance sheet continues to remain strong. Thanks to the steps we have taken since the start of the pandemic to further improve our liquidity, capital stack, maturity ladder and overall cost of debt. At December 31, 2022, we had approximately all of our $1.45 billion revolving credit facility available for use, as well as $297 million in cash. Our next debt maturity is $350 million of 4.375% notes due in August. In 2020, we entered into $400 million of 10-year interest rate swaps at an average swap rate of 0.8675%.

These swaps expire in 2024 and provide us with significant cost certainty when we refinance our 2023 bonds. The swaps are valued at approximately $90 million as of December 31st. At December 31st, 98% of our $5.3 billion in debt was at fixed rates and our net funded debt to annualized EBITDA was 5.3 times, consistent with all previous quarters this year and our fixed charge coverage ratio was 3.9 times. It's important to note, similar to NAREIT FFO, adjusted FFO and FAD, EBITDA and these liquidity calculations includes our ability to apply collateral and recognize revenue related to operator's non-payments previously discussed. To the extent that collateral becomes exhausted, a decrease in EBITDA will impact our liquidity ratios. Lastly, as a housekeeping item, effective for the fourth quarter of 2022, we adjusted our presentation of certain financial statement line items on our consolidated balance sheet to better align with similar companies in the healthcare real estate sector.

Mortgage notes receivable has been renamed real estate loans receivable, other investments has been renamed non-real estate loans receivable and certain loans have been reclassified out of other investments into real estate loans receivable based on their underlying collateral. We provided a table in the press release reconciling the prior presentation with the current presentation. I will now turn the call over to Dan.

Dan Booth: Thanks, Bob, and good morning, everyone. As of December 31, 2022, Omega had an operating asset portfolio of 901 facilities with approximately 90,000 operating beds. These facilities were spread across 65 third-party operators and located within 42 states in the United Kingdom. Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio as of September 30, 2022, decreased to 1.37 times and 1.04 times, respectively, versus 1.39 times and 1.06 times, respectively, for the trailing 12-month period ended June 30, 2022. During the third quarter of 2022, our operators cumulatively recorded approximately $18.6 million in federal stimulus funds as compared to approximately $29 million recorded during the second quarter.

Photo by National Cancer Institute on Unsplash

Trailing 12-month operator EBITDARM and EBITDAR coverage would have decreased during the third quarter of 2022 to 1.21 times and 0.88 times, respectively, as compared to 1.23 times and 0.90 times, respectively, for the second quarter when excluding the benefit of any federal stimulus funds. EBITDAR coverage for the standalone quarter ended 9/30/2022 for our core portfolio was 0.91 times, including federal stimulus and 0.83 times excluding the $18.6 million of federal stimulus funds. This compares to the standalone second quarter of 0.96 times and 0.84 times with and without $29 million in federal stimulus funds, respectively. Occupancy for our core portfolio has continued to trend up from a low of 74.6% in January of 2022 to 78.3% as of mid-January 2023 based upon preliminary reports from our operators.

Turning to our senior housing portfolio. Today, our overall senior housing investment comprises 184 assisted living, independent living and memory care assets in the U.S. and the U.K. This portfolio on a pure-play basis had its trailing 12-month EBITDAR lease coverage increased to 0.97 times at the end of the third quarter, as compared to the end of the second quarter, which covered at 0.94 times. Based upon preliminary results, occupancy for this portfolio has remained steady at 85.3% as of mid-January 2023 versus 83% in January of 2022. Turning to portfolio matters, Agemo. The restructuring of Agemo concluded in the fourth quarter of 2022. In all, 22 facilities were sold to third-parties for $366 million. The remaining portfolio consisting of 11 facilities in Kentucky and 18 facilities in Tennessee are contractually obligated to resume rent and interest in April of 2023 in the amount of $27.9 million per annum.

As part of the overall restructuring, the master lease with Agemo extended from December 31, 2030, to December 31, 2036. LaVie, during the latter part of 2022, LaVie, Omega's largest tenant, while continuing to pay full rent throughout 2022, began to anticipate imminent liquidity concerns as occupancy improvements were slower to materialize, labor costs continue to pose ongoing challenges, particularly in the widespread use of agency personnel and many other operating expenses such as food costs and supplies continue to increase in the face of inflationary pressures. Accordingly, during the fourth quarter, Omega and LaVie began earnest discussions around a portfolio restructuring that would involve an overall reduction in certain underperforming facilities.

As part of that restructuring, Omega divested 11 facilities, 10 in Florida and one in Louisiana via sale to a third-party for a gross sales price of $130 million, of which Omega provided seller financing in the amount of $105 million. The seller financing is collateralized by mortgages on the 11 facilities, bears a fixed rate of interest of 8% and matures in five years. It is anticipated that as part of our restructuring, Omega would potentially sell an additional 16 facilities in the first half of 2023, subject to a host of conditions, including documentation, regulatory and other governmental approvals and third-party due diligence to name a few. Also, as part of this restructuring, Omega has agreed to a partial rent deferral in the first four months of 2023.

The rent deferral equates to an approximately 66% discount to the full contractual rent. It should be noted that these restructuring discussions are ongoing and that the future outcome cannot be definitively quantified. Healthcare Homes, Healthcare Homes, Omega's largest operator in the U.K. with 42 care homes and annual rent of approximately ?￡20 million, started dealing with liquidity issues in late 2022. These liquidity issues are predominantly driven by increased utility costs, increased agency costs and occupancy levels slightly below pre-pandemic levels. The increased utility costs are due to the timing of the expiration of their previous utility contracts in September of 2022. Even with government support, Healthcare Homes utility costs increased by over four-fold after the expiration of their previous in-place contracts.

To assist Healthcare Homes with these liquidity issues, Omega has agreed to allow up to four months of rent deferral from January 2023 through April of 2023. Omega will continue to monitor Healthcare Homes liquidity needs to evaluate the potential for any future deferrals, as well as review certain underperforming facilities as potential divestiture candidates. Maplewood, in January of 2023, Omega restructured the Maplewood relationship, which is comprised of 17 high end senior housing facilities in upscale urban and suburban locations, predominantly located in the Northeast region of the United States. The restructuring was done to better align Maplewood's current cash flows with rent and interest obligations due to Omega. Although occupancy has now largely recovered at the Maplewood facilities, the pandemic caused a decline in their occupancy and similar to other operators, a long-term increase in labor costs.

Also, as previously announced, construction constraints during the pandemic resulted in delayed openings and elevated costs at the Manhattan and Princeton developments. As part of our restructuring, Omega has agreed to, one, defer rent escalators through year-end 2025, two, deferred interest payments due on our secured credit facility by permitting payment-in-kind until cash flow permits future payments anticipated to begin in 2024, and three, increased the secured credit facility by $13 million to support near-term liquidity needs for lease-up at the Carnegie Hill facility in Manhattan and the Princeton facility. Please note, Maplewood's credit facility is secured by their contractual right to a portion of the net profits upon a sale of the portfolio.

Omega anticipates all deferred payments will be repaid either through improved cash flow upon stabilization of the portfolio or through an allocation of proceeds from a sale of the portfolio. Both Carnegie Hill and Princeton continue to lease up as projected, based on the actual in-service dates with current occupancy levels of 57% and 86%, respectively. Other operators, as previously mentioned, an existing Omega operator representing approximately 2.4% of total rent, began to experience liquidity issues during 2022. Accordingly, this operator has failed to pay full contractual rent since March, and as such, Omega has utilized the security deposit in the amount of approximately $2 million to offset a portion of this rent shortfall. Omega is currently in discussions with this operator, which will likely result in the transition of this portfolio to a third-party sometime during the first quarter of 2023.

In the second quarter of 2022, another Omega operator, representing approximately 2.2% of Omega's total rent began making only partial monthly rent payments, thus causing Omega to begin utilizing existing $5.4 million security deposit to offset shortfalls. As such, Omega and this operator began having discussions concerning potential sales and/or releases of this operator's portfolio. To that end, in the fourth quarter of 2022, Omega released three facilities to an unrelated third-party for an initial annual rent of $1.6 million. So far, in the first quarter of 2023, Omega has released an additional 16 facilities to third-party operators for an initial annual rent of $11.2 million, thus leaving only four remaining facilities with this operator.

It is expected that these four facilities will likely be released in the coming months. As a result of these releases, including the remaining four facilities, Omega expects to receive new rent of roughly 77% of the previous operators former contractual rent or $17.3 million versus $22.4 million. Turning to new investments. On December 1, 2022, Omega closed on a $78 million purchase lease transaction for six facilities in North Carolina with an existing operator. Also on December 1, 2022, Omega closed on a sale-leaseback transaction for one facility in Pennsylvania with the same operator. Concurrently with these acquisitions, Omega amended the existing operator's master lease to include the seven facilities at an initial cash yield of 9%, with 2% annual escalators.

Omega's new investments and capital expenditures for the quarter totaled $103 million. In 2022, Omega made new investments totaling $403 million, including $70 million for capital expenditures. Turning to dispositions, during the fourth quarter of 2022, Omega divested 33 facilities for a total sales price of $421 million. These sales numbers include 11 LaVie facilities and 20 of the 22 Agemo facilities mentioned earlier. In 2022, Omega sold a total of 77 facilities for approximately $859 million. I will now turn the call over to Megan.

Megan Krull: Thanks, Dan, and good morning, everyone. While the announcement this week at the end, the public health emergency effective May 11th of this year, is perhaps not unexpected, it is not particularly ideal given some of the benefits that it provided the long-term care industry, which is still deeply entrenched in post pandemic recovery phase. Specifically, the three-day stay waiver was still tied to the PHE and will now end on May 11th. This waiver huge benefit to the industry during the height of the pandemic as the reimbursement associated with the ability to scale in place helped to offset some of the increased costs connected with managing COVID outbreaks. That said, the other major benefit of the PHE was the continuation of the enhanced 6.2% FMAP add-on.

However, that had already been delinked from the PHE as a result of the Consolidated Appropriations Act of 2023, which passed in late 2022. That act provided for a phase-down of the add-on throughout 2023 from 6.2% in the first quarter to 5% in the second quarter, 2.5% in the third quarter and down to 1.5% in the fourth quarter with no add-on provided after 2023. It is too soon to tell what the impact of those reductions will have on the FMAP rate add-ons that certain states like Texas had been providing to skilled nursing providers. In terms of recovery, while occupancy is continuing to slowly rebound, not unexpectedly the recovery has tapered off slightly in these winter months. However, 31% of core facilities have now recovered from an occupancy perspective, up from 29% in the second quarter, while another 24% of core facilities that have not yet fully recovered are at or above 84% occupancy.

Based on the January 2023 jobs report for Long-Term Care, ACA reported that as of December 2022, nursing homes are still down 13.3% of their workforce as compared to February 2020, with assisted living facilities faring somewhat better at a loss of 0.9%, with the rate of new job added slowed a bit to 2,740 jobs per month added from July 2022 through December 2022. But many of our operators are becoming more cautiously optimistic as despite the fact that the staffing shortages are still causing self-imposed admission bans, they are experiencing a moderation of agency usage and staffing turnover easing in general of late. While agency expense on a per patient day basis for our core portfolio for third quarter 2022 continues to be elevated at 6 times what it was in 2019, similar to where it was in second quarter 2022, the preliminary results we are seeing for September through November 2022 shows slightly more than a $2 per patient day decrease in agency expense over where it was in third quarter.

We also continue to keep a close eye on Medicaid rate setting, particularly Texas and we are encouraged by recent payouts or announcement of payouts of American Rescue Act funds in both Texas and Ohio. Our hope is that as we exit the PHE and the enhanced FMAP winds down, the states, in particular, will rate set on pace with inflation or in excess thereof, if they have not already and that the federal government will not make any hasty move to provide for unfunded mandates. I will now open the call up for questions.

See also 10 Hot Insurance Stocks To Buy Now and 15 Best Dividend Leaders to Buy .

To continue reading the Q&A session, please click here.