Omega Healthcare Investors, Inc. (OHI) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Omega Healthcare Investors Inc. Second Quarter Earnings Conference Call. [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.

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 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.

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 of increase in rent from cash basis operators. One operator will be 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 that by $0.035 from Q2 to Q3. When the LaVie restructuring is completed, we expect a significant increase in cash rents, 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 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 LaVie. LaVie's 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 transitioned, which sees the balance of $2.6 million representing 8 small operating relationships. I will now turn the call over to Bob.

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 to [ resolve the ] timing related to operator restructurings, revenue from new investments needed in 2022 and 2023, partially offset by assets asset sales completed through that time, same time for [ NTP ]. 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 of 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 that 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 $0.015 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 $0.67 dividend with a path to return to a normalized payout ratio in [indiscernible] 80s to low 90s in 2024. Our balance sheet intends 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 annualized adjusted normalized EBITDA of 5.1x. And our fixed charged coverage ration was 4.1x. I'll now hand over to Dan.

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 1.4x for the trailing 12-month period ended December 31, 2022. During the first quarter of 2023, our operators' cumulative 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 stand-alone quarter ended March 31, 2023, and for our core portfolio was 1.8x, including federal stems and 1.15x, excluding the $5.8 million of federal stimulus funds. This compares favorably to the stand-alone 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 the 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 releasing 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 estate of Greg Smith to address these shortfalls. 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 4 facilities in West Virginia and a $104.6 million in mezzanine financing. Concurrently with these acquisitions, Omega amended an existing operator's master lease to include the 4 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, of 2023. Omega purchased 1 additional facility in West Virginia for $13.7 million. The facility was added to an existing operator's master lease and the initial cash yield of 10% with 2.5% annual escalators. Additionally, on June 30, 2023, Omega closed on a $10 million mezzanine loan, an existing operator. The mezzanine loan bears an interest rate of 11%, has a 5-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 a $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 will now turn the call over to Megan.

Thanks, Dan, and good morning, everyone. We continue to see slow positive momentum in occupancy with the number of core facilities not recovered at 35% and up slightly from the 30%, 33% reported in the fourth quarter. Additionally, 25% of core facilities have not yet fully recovered, are at or above 84% occupancy. Staffing shortages while continuing to moderate persist the [indiscernible] overall recovery and continuing to vary by market. In June, ACA released the results of 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 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 front, just this week, CMS issued its final 2024 payment rules, resulting in a net increase or 4%, approximately $1.4 million, 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 as 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 recalibration. And on the state side, while the magnitude of certain state -- 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 add-on to be included in its permanent rate setting starting September 1, in addition to a small increase above that. And Florida provided for up to 5% rate increase starting October 1. While much of 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 setting. Or more and more states or time 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 will now open the call up for questions.

[Operator Instructions] Our first question is from Tao Qiu from Berenberg.

LaVie was a positive surprise this quarter. I appreciate the cut on the $0.035 step down for the next quarter. I think there are a few additional puts and takes for the next quarter. I think Maplewood was below expectations, and you still have security deposit you apply. I think there's one more month of rent coming from health care homes. The share count is higher. I'm just wondering if you could help us bridge to the third quarter on the FAD number.

I think -- this is Paul. I think you hit on -- the only other component to look at, I did mention the incremental revenue related to acquisitions completed in the quarter. And then also Taylor, and I both mentioned that the shares issued or issued late in the quarter. So you're going to have some modest impact based on the weighted average shares.

Okay. And just one follow-up. We got the 4% Medicare update earlier this week, and thanks for the comments about Texas and Florida. I think California is also pretty well. Now, I'm just wondering if you could walk us through some of your other big markets, for example, Indiana, North Carolina, Pennsylvania [ et cetra ]. And what are you seeing in those states in terms of the 2024 Medicaid reimbursement rates?

Yes. Some of them are a little bit too early to tell. Indiana, I think that they're still hoping for an inflationary increase of somewhere in the 3% to 4% range, but I don't think that's been finalized quite yet. But remember, in Indiana, we've got the UPL too. So that Medicaid rate setting doesn't necessarily impact our coverages the same way. Pennsylvania, I think there was a little bit of a rate reduction actually in July. Just a small one due to there was a budget factor rate decrease related to the January 1 increase. And they're hoping that gets reversed in January. But again, way too soon to tell for Pennsylvania. They have that really large increase last year. So I think they're pretty well set for the moment. And then North Carolina, that's when we've really been watching and they were supposed to -- they thought they would get their budget approved earlier, but they haven't yet. They have a $37 [ PHE ] FMAP add-on. We've been trying to get into the rate we think is likely to happen, that's what the operators are pushing for at the moment as the state has pushed that $37 or most of it out at least for August right now until they finalize the budget, but they're hopeful that they get that put in.

[Operator Instructions] Our next question comes from Jonathan Hughes from Raymond James.

I was hoping you could dig a little deeper on the LaVie. I know that restructuring has been ongoing for some time now and that they paid more rent than expected in May and June. But I guess why did they pay more rent if they didn't necessarily have to.

It really boils down to cash on hand. They were a little bit more liquid in the second quarter than they anticipated. And so they were able to make the full rent payments for May and June. We've got some transitions coming up. So the expectation is that their cash and their liquidity is going to go down until those transitions occur. Like with any transition that involves a sale, they take a while. There's a lot of lead time running up to that. There's a lot of third parties that we have no control over. The expectation is for -- at least for right now in the third quarter, we'll see that reduced rent amount.

Okay. And then maybe my follow-up and [indiscernible] still waiting on this, but any user or updated expectations just on the staffing mandate that we've all been waiting for, for a few months now. I think one of the operators said, hopefully, we can have it by the end of the month, but just any views there would be helpful.

Honestly, we don't have that crystal ball at the moment. I mean we hear the same thing that I'm sure you guys hear. I think we view the fact that this hasn't come out yet despite the fact that it should come out in April, that's a positive that hopefully CMS has gotten a ton of comments related to this in terms of -- don't have a one-size-fit-all mandate and hopefully push it out until there is a staffing crisis, and we're hopeful that they'll take a balanced approach based on how long they're [indiscernible] we still have any clarity as to when it will come out. But remember, as well that it's going to be come out of the proposed rule, right? So there's going to be a comment period. And so ACA has historically been very good at getting things more beneficial than what it first comes out as.

And our next question comes from Connor Siversky from Wells Fargo.

I would like to dig into Maplewood. Apologies if I missed this in Dan's remarks, but could you quantify at all what cash flow ramp looks like from today through the end of 2023 between the lease-up of Second Avenue and potential rate increases at the end of the year or awarded differently? I mean, how much EBITDA could we see from second half? How much from rate increases? And do you think that would cover the rent shortfall?

Yes. Just put to make this a relatively longer answer, Connor, just because I think the context is important. So if you look at Maplewood as a whole, the core portfolio, excluding Second Avenue, it's performing very well. Their occupancy is at pre-COVID levels. They have significant cash flow. And then you look at Second Avenue, which is in [indiscernible], 61% occupied it has now positive cash flow pre rent. So incremental occupancy is just going to add to that cash flow, and we expect another 10% of incremental occupancy. So from 131 residents to 151 by year-end. And obviously, that has a lot of power in terms of cash to the bottom line. On the foot side, rate increases have typically in January. So you do have whatever inflationary impact between now and the end of the year that will cut into a little bit into that cash flow. So to get you a precise number is difficult it probably doesn't change much from the $1 million deficit we're seeing today. But then just to close the loop on the rate increase piece of the puzzle, Maplewood's total revenue is about $200 million. So when you think about last year's rate increases, which were high single, low double digit. With the expectation in the industry is something similar for high-end properties, that's a really meaningful in terms of the amount of top line revenue to overcome the cash deficit we have today. So long answer to your question, but I think that context is important.

And then just as it relates to the line of credit and the building deferral balance. I mean what does the total tab to OHI look like currently? How big do you expect that to get? And then is there a threshold that you wouldn't want to cross?

So we're at $270 million round numbers, and we don't expect to fund any additional cash into that line. Remember, we have interest that we're on a cash basis with Omega. So we continue to accrue interest that obligation continue to run to Maplewood. But from a cash perspective, we're done funding that one.

Next question come from Michael Griffin from Citi.

Just maybe circling up on labor availability conversations with your operators, do you have a sense of kind of where agency labor utilization is trending expectations for the back half of the year? And kind of where do you need to see occupancy to get to really ease a lot of those labor pressures.

I mean from an agency perspective, it's definitely improving. That's what we're hearing anecdotally from our operators and certain operators are able to get out of it completely, but it's really geographically based. I mean Florida tends to be one of the states that's having severe staffing shortage. So it really just depends on where you are. And in terms of occupancy, we always talk about that national 84% and getting back up close to there. I mean we're close to that 80%. But with agencies still high, we just need to work through some of the staffing issues to solve those problems.

Great. That's helpful. And then maybe switching to external growth opportunities. Can you give us a sense of what the forward pipeline is looking like? You've done a number of investments year-to-date. Just kind of can you quantify maybe that opportunity set and where relative to where they might have been previously?

So I don't want to necessarily quantify, but I will say it's quite active. We're looking at a fair number of deals about here in the States and abroad in the U.K. I'd say the U.K. is particularly active. We're seeing some opportunistic transactions here in the states, and we're going to try to take advantage of some of those I think what we've done year-to-date is a pretty good proxy for what we hope to do in the next latter half of the year. As far as rates go, yes, we're seeing cap rates move up, we're starting to bid our deals, as you've seen, high 9s low 10s.

And our next question comes from Joshua Dennerlein from Bank of America.

In the opening remarks, you mentioned there was a certain subset of the portfolio still covering low 1x, I didn't hear them out. But just curious, is there any kind of big picture theme that's causing that part of the portfolio to lag versus like the overall at 1.15?

I don't know that there's necessarily a theme. When you break down those buckets will be the big piece, obviously, when we talk about that, we're fixing that. But then you have another significant piece of that [indiscernible] that we have pretty good visibility that's going to -- that they'll climb out of that below 1 bucket. And then you get back to the handful of operators where there's not a lot of visibility. They're small. It's under 3%, and that's where we've run historically for many, many years. So I think there's a pathway, honestly, to look at that below 1x bucket, and it's going to take a little while, where we climb for that bucket and get back into less than 5% of our portfolio there. It's not going to be next quarter, but we have visibility. It's pretty good.

The part of the bucket that you expect to climb out of that, any kind of time frame on that? Is it -- or -- yes, I guess, maybe just time frame, just I'm trying to think through it.

Well, I think I'll give you the big two examples, LaVie is just subject to finishing the restructuring. And as Dan mentioned, it's taking longer than any of us on either side of structuring table but it will happen this year. And then you have 8.1% that are running currently above 1x. So that's just a question in terms of how we report, waiting for the trailing 12 to catch up. So you've got almost -- you've got almost 18% right there in those 2 buckets. And then you have the restructuring activity. So I think a lot of this will have reporting visibility going into Q1 that will make a lot of people more comfortable.

And our next question from Steve Valiquette from Barclays.

This is [indiscernible] on for Steve Valiquette. First question would be, I just wanted to kind of get a sense of how the ending of the PHE back in May has affected the business in June and July or most recently, let's say, just to kind of quantify a better sense of how that's been impacted. And then just also wanted to kind of touch on the previous question. Assuming LaVie is the operator that's closest to completion. Would you still say that it's in line with reducing the number of operators with an EBITDAR coverage ratio below 1x, down to that 20% range? And just like confirm that if the operator is closest to being fully restructured?

So the public health emergency, I would say there hasn't been a very large impact. Obviously, the filing in place that's gone, but a lot of that was kind of tapered off anyway, it's not a huge impact. The other piece of it is really the FMAP which we've gone over some of these states that have large FMAP increases in most of them. Like California put that through the end of the year. Hopefully, next year, that will get added on permanently. Texas that's going to have their FMAP rate in their permanent rate as well. So most of these states have either deal with it or about to deal with it. So I'd say not much of an impact at this point.

And then the second half of the question, yes, LaVie, the 9.5% of the 29.9%. So one, LaVie has restructured here, call it, 20%. And then you have the 2 buckets of operators with strong -- very, very strong balance sheet to 6.2%. And then you have the 8.1% bucket of operators that had Q1 EBITDAR above 1x. So that's another 14%. And I think we'll have visibility around all of that, again, not next quarter, but in the -- by the time we roll into 2024, I think a very good visibility that gets you down to 6%, and we're working a big chunk of that 6%. So the numbers should get down to historical levels, sub-5 if things continue as they're trending today.

All right. And super quickly, do you still intend on being net acquirers for the year?

That would be the expectation given what we have held for sale, which is de minimis and what we're restructuring, which other than the restructuring around LaVie, we don't have anything big out there.

[Operator Instructions] Our next question comes from Vikram Malhotra from Mizuho.

Maybe just first one, I wanted to clarify, you mentioned the share count impacting the 3Q FAD run rate I just want to clarify, if you remind me this quarter, I thought you had said you were hoping for it to hit sort of $0.70 FAD number by 4Q. And I think now I'm saying you're probably more approximating to the dividend. Is it just the shares? I just want to clarify, just the capital raise, nothing else on the tenant front that you're breaking in to get to that 80% coverage in now 2024?

Well, the shares absolutely have an impact, but I -- and again, getting in 2024 is also getting LaVie restructured a big piece of that as well.

That's helpful. And just thinking about the outcome eventually of sort of the minimum staffing rule, whenever it comes, I'm just wondering if you sort of looked at a couple of scenarios where they require sort of the 4.1 [indiscernible], but the time line is maybe sooner than anticipated versus a relatively long period to a year to the standard. In a more, In call it, negative scenario, is there an assessment you've done on how coverages maybe impacted for operators?

We haven't just because it's way too soon, given that nothing has come out yet and we think -- look, you're probably -- if this comes out from [indiscernible] tomorrow, you probably wouldn't have it come into place next year, right? And so -- but we're hopeful it gets pushed out and so this staffing shortages improved. But there's really no good way to drill down into that. ACA has put out something like [ 4.1 ], it would cause the industry being like $10 billion. But to get there, I mean, it's really to figure out how that would affect the operators on a daily basis. They can't do something so draconian then it puts everybody out of business.

And our next question comes from Wes Golladay from Baird.

A quick question on the staffing. I guess what is the dynamic there? Is there -- are you seeing lower turnover? Or is there still a lot of churn, a lot of new hires and a lot of people quitting?

I think folks are doing a better job at lowering the turnover, certainly and finding folks out there. I think turnover is getting better, and I think -- there's also some operators who've been successful with bringing [indiscernible] from international areas to help boaster that as well.

And then you mentioned the $93 million gain. Can you remind us what is the plan, I guess, from a financing perspective? Is there a certain time period where if you were to roll that gain into a new offering, it could reduce your interest expense and maybe the accounting behind that?

Yes. Basically, we have mid-2025 to roll that into a debt offering of at least 5 years or longer, and then we'll amortize it over the new offering, from a P&L standpoint.

That is the last question for today. At this time, I would like to turn the call back over to Taylor Pickett for any closing remarks.

Thanks, everybody, for joining us today. As always, we're available for any follow-up questions.

Thank you. This conclude today's conference. We thank your participation. You may disconnect your lines at this time, and have a wonderful day.