Omega Healthcare Investors, Inc. (NYSE:OHI) Q2 2023 Earnings Call Transcript

Omega Healthcare Investors, Inc. (NYSE:OHI) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Good day, ladies and gentlemen, and welcome to the Omega Healthcare Investors Incorporated Second Quarter Earnings Conference Call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Michele Reber. Ma'am, the floor is yours. I think you are on mute.

Michele Reber: Thank you, and good morning. With me today are Omega's CEO, Taylor Pickett; COO, Dan Booth; CFO, Bob Stephenson; Megan Krull, Senior Vice President of Operations. Comments made today on this conference call that are not historical facts may be forward-looking statements such as statements regarding our financial projections, dividend policy, portfolio restructuring, rent payments, financial condition or prospects of our operators, contemplated 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 on a 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 second quarter 2023 earnings conference call. Today, I will discuss our second quarter financial results and certain key operating trends. Second quarter FAD, funds available for distribution of $0.70 per share significantly exceeded the first quarter of $0.60 per share, comfortably ahead of our $0.67 per share dividend. The FAD dividend payout ratio is 96%. The large increase in FAD is primarily due to the resumption or increase in rent from cash basis operators. One operator LaVie paid partial rent in April and full rent in May and June, which results in a $0.035 increase in FAD quarter-over-quarter. As Dan will discuss, LaVie is still being restructured and we have agreed to partial rent payments of 2.5 million per month for the third quarter, which will reduce FAD by $0.035 from Q2 to Q3.

When the LaVierestructuring is completed, we expect a significant increase in cash rents from the current agreed upon partial rent payments. In addition, during the second quarter, we issued 6.6 million shares of common stock to fund our pipeline and delever. These additional shares will put some modest pressure on our future FAD per share. Turning to positive operating trends. First quarter EBITDAR coverage, excluding CARES Act support, continues to improve, increasing to 1.15x versus 1.09x in the prior quarter. This level of coverage reflects continued occupancy improvement, strong state reimbursement rates and moderation in the still difficult labor market. The under 1.0x EBITDAR operators represent 29.9% of total rent. We can break the 29.9% into a handful of buckets.

Operators representing 6.2% of the 29.9% are sitting on extremely strong balance sheets and therefore payment of rent should not be an issue. Operators representing 8.1% at first quarter EBITDAR coverage above 1.0x, 9.5% represents with these first quarter EBITDAR coverage, when excluding the anticipated sale or transition of 23 facilities is also above 1.0x. That lease operators representing 6.1% of which operators representing 3.5% are in active restructurings where were recently conditioned, which sees the balance of $2.6 million representing a 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 second quarter. Revenue for the second quarter was $250 million before adjusting for certain nonrecurring items compared to $245 million for the second quarter of 2022. The year-over-year increase is primarily the results of timing related to operator restructurings, revenue from new investments completed in 2022 and 2023, partially offset by asset sales completed through that time, same timeframe for instance. Our NAREIT FFO for the second quarter was $155 million or $0.63 per share as compared to $161 million or $0.66 per share for the second quarter of 2022. Our adjusted FFO was $183 million or $0.74 per share for the quarter, and our FAD was $173 million or $0.70 per share and both excludes several items in systems with historical practices as outlined in our adjusted FFO and FAD reconciliation to net income found in our earnings release as well as our second quarter financial supplemental posted to our website.

As Taylor mentioned, the $0.70 a FAD for the second quarter was $0.10 greater than our first quarter FAD. This increase was primarily driven by incremental revenue from LaVie. The completion of workout arrangements and timing of payments from other cash basis operators partially offset by additional weighted average shares. In the second quarter, we closed on $270 million in new investments. 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. We have a number of operators on a cash basis for revenue recognition, including LaVie, which is projected at $2.5 million per month. We will only report FAD from our cash based operators to the extent payments are received or security deposits are applied.

It's important to note that our third quarter FAD will also be impacted by the increase in the weighted average shares outstanding as we issued 6.6 million shares for proceeds of approximately $200 million in June. For every 6 million shares issued, our quarterly FAD is negatively impacted by approximately $0.105 per share until the cash is put back to work in new investments. In summary, consistent with the commentary provided last quarter, we still expect Q4 FAD payout ratio to approximately cover our 66% dividend with a FAD to return to a normalized payout ratio in the high 80s to low 90s in 2024. Our balance sheet continues to remain strong. In the second quarter, we issued 6.6 million shares for $200 million of equity, and we also terminated our $400 million in treasury locks, which generated $93 million of cash gain leaving us with $350 million in cash at June 30.

On August 1, we used the balance -- we used the balance sheet cash to repay a $350 million bond maturity. Looking forward, based on the current capital markets, our active pipeline, in April 1, 2024, $400 million bond maturity. We expect to continue to be opportunistic in the equity capital markets while targeting leverage in the low 5s. At June 30, 99% of $5.3 billion in debt was at fixed revenues and our net funded debt to annualize adjusted normalized EBITDA of 5.1x and our fixed charge coverage ratio was 4.1x. I'll now hand over to Dan.

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Dan Booth: Thanks, Bob, and good morning, everyone. As of June 30, 2023, Omega had an operating asset portfolio of 893 facilities with approximately 88,000 operating beds. These facilities were spread across 66 third-party operators and located within 42 States in the United Kingdom. Trailing 12 month operator EBITDAR coverage for our core portfolio as of March 31, 2023 increased to 1.1x versus 1.04x for the trailing 12 month period ended December 31, 2022. During the first quarter of 2023, our operators cumulative have recorded approximately $5.8 million in federal stimulus funds, as compared to approximately $20 million recorded during the fourth quarter. Trailing 12 month operator EBITDAR coverage would have increased during the first quarter of 2023 to 1.02x, as compared to 0.92x for the fourth quarter, when excluding the benefit of any federal stimulus funds.

EBITDAR coverage for the standalone core ended March 31, 2023 for our core portfolio was 1.8x including federal stimulus and 1.15x, excluding the $5.8 million of federal stimulus funds. This compares favorably to the standalone fourth quarter of 1.19x and 1.09x with and without the $20 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 to 79.6% as of mid-July of 2023 based on preliminary reporting from our operators. Turning to portfolio matters, LaVie, as previously mentioned, Omega and LaVie are in process of restructuring their portfolio by transitioning certain underperforming facilities, most located in the state of Florida. To date, 13 facilities have been divested.

Currently, Omega is in the process of selling or releaseing an additional 23 facilities, most of which are expected to be transferred throughout the fourth quarter of 2023. During the second quarter of 2023, LaVie paid partial rent in April of $2.5 million and full contractual rent for May and June of $7.2 million each month. In anticipation of the future transition of 23 additional facilities, Omega has agreed to allow LaVie to short pay rent by approximately 66% during the third quarter of 2023. Maplewood, in the second quarter, Maplewood short paid its contractual June and July rent by $1 million per month. We currently are working with Maplewood and the state of Greg Smith to address these short falls. Based on Maplewood's latest cash flow projections, which incorporate anticipated January rate increases and improved census at the Second Avenue Facility in Manhattan, Maplewood believes there is a path forward to meet its full contractual rental obligations in the first quarter of 2024.

In August, we drew on a $4.8 million security deposit and we'll be applying the security deposit to any rental shortfalls realized in the third quarter. In addition to the aforementioned restructurings and transitions, Omega is working with several other relatively small operators on various restructures. Turning to new investments, as previously announced on April 14, 2023, Omega closed on a $219 million transaction, which consisted of 114.8 million purchase lease transaction for four facilities in West Virginia and a $104.6 million in mezzanine financing. And currently with these acquisitions, Omega amended an existing operator's master lease to include the four facilities and an initial cash yield of 9.5% with 2.5% annual escalators. The mezzanine financing was given to the same existing operator bearing an interest rate of 12% and was part of the capital stack to purchase 13 additional facilities in West Virginia.

Also, as previously announced, on May 1, 2023, Omega purchased one additional facility in West Virginia for $13.7 million. The facility was added to an existing operator's master lease with an initial cash yield of 10% with 2.5% annual escalators. Additionally, on June 30, 2023, Omega closed on $10 million mezzanine loan to an existing operator. The mezzanine loan bears an interest rate of 11% as a five-year term and was part of a capital stack to purchase 12 facilities in Pennsylvania. Omega closed on a total of $270 million in new investments in the second quarter of 2023, including 17 million in capital expenditures. Year-to-date, Omega has closed on $313 million of new investments, including $29 million in capital expenditures. Turning to dispositions during the second quarter of 2023, Omega divested 10 facilities for a total of $45 million in proceeds.

Year-to-date, Omega has divested 12 facilities for a total of $62 million in proceeds. I'll now turn the call over to Megan.

Megan Krull: Thanks, Dan, and good morning everyone. We continue to see slow positive momentum and occupancy with the number of core facilities now recovered at 35%, up slightly from the 33% reported in the fourth quarter. Additionally, 25% of core facilities that have not yet fully recovered are at or above 84% occupancy. Staffing shortages while continuing to moderate persist, delaying overall recovery and continuing to vary by markets. In June after released the results of the survey of 425 nursing home providers results of which showed that 52% are still limiting new admissions due to stocking shortages. Agency expense on a per patient day basis for our core portfolio for first quarter 2023 remained at 5x where it was in 2019, which while consistent with last quarter did show modest month over month improvement, helping to offset some of these persistent expense increases.

On the rate setting for adjustment leak CMS issued its final 2024 payment rule resulting in a net increase of 4% or approximately $1.4 billion, which is slightly better than the 3.7% provided for in the proposed rule. This included a 6.4% net market basket update consisting of a 3% market basket increase plus a 3.6% market basket forecast error adjustment offset by a 0.2% productivity adjustment, as well as the remaining 2.3% PDPM parity adjustment recalibrations. And on the state side, while the magnitude of certain rate increases is not exactly what we had hoped for in certain areas, it is still moving in the right direction. Texas of note provided for at least the $19.63 COVID FMAP add-on to be included in its permanent rate setting starting September 1st in addition to a small increase above that and Florida provided for up to a 5% rate increase starting October 1st.

While much the Florida rate is based on quality indicators, meaning that not all operators will see this large of an increase, it does represent somewhat of a trend in rate settings where more and more states are tying reimbursement increases to quality measures. Assuming this is done in a thoughtful manner, this is something that we welcome, however, it should never fully replace increases tied to the inflationary environment. I'll now open the call up for questions.

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