Omega Healthcare Investors(OHI) - 2022 Q4 - Annual Report

PART I Business Omega Healthcare Investors, Inc. is a REIT investing in U.S. and U.K. skilled nursing and assisted living facilities, with revenue from leases and loans Overview - Omega is a Real Estate Investment Trust (REIT) structured as an UPREIT, with assets owned and operations conducted through its operating partnership, OHI Healthcare Properties Limited Partnership (Omega OP)[19] - As of December 31, 2022, the parent company owned approximately 97% of Omega OP Units, with other investors owning the remaining 3%[19] - The company has one reportable segment: investments in healthcare-related real estate properties located in the U.S. and the U.K[20] Investment Strategy & Types - The company's core business is financing the long-term healthcare industry, focusing on SNFs and ALFs, with other property types including ILFs, specialty facilities, and MOBs[21][22] - Investment evaluation criteria include operator quality and creditworthiness, facility cash flow, physical condition, location, and the regulatory environment[22][29] Annualized Yields by Investment Type (as of Dec 31, 2022) | Investment Type | Average Annualized Yield | | :--- | :--- | | Operating Leases | ~9.0% | | Real Estate Loans | ~10.1% | | Non-Real Estate Loans | ~8.7% | Portfolio and Investment Summary - As of December 31, 2022, the portfolio included 926 healthcare facilities across 42 states and the U.K., operated by 67 third-party operators[33] Total Investment Assets (in millions USD) | | As of December 31, 2022 | As of December 31, 2021 | | :--- | :--- | :--- | | Total real estate investments | $10,099.9 | $10,618.1 | | Non-real estate loans receivable – net | $225.3 | $124.2 | | Total investments | $10,325.2 | $10,742.3 | Revenues by Investment Category (in millions USD) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Rental income | $750.2 | $923.7 | $753.4 | | Real estate loans interest income | $110.3 | $123.6 | $117.3 | | Total revenues | $878.2 | $1,062.8 | $892.4 | Government Regulation and Reimbursement - A significant portion of operators' revenue comes from government-funded programs like Medicare and Medicaid, making them vulnerable to reimbursement rate reductions and regulatory changes[47] - The federally declared public health emergency for COVID-19, providing regulatory waivers and financial support, is scheduled to terminate on May 11, 2023, creating uncertainty for operators[45] - The CARES Act authorized approximately $178 billion through the Provider Relief Fund to support healthcare providers during the pandemic, with no additional funding expected[50] - The full 2% Medicare sequestration, reducing payments to providers, went back into effect on July 1, 2022, and is extended through fiscal year 2031[52] - For fiscal year 2023, CMS finalized a net Medicare Part A payment increase for SNFs of 2.7%, or $904 million, including a phased-in 4.6% parity adjustment to the Patient Driven Payment Model (PDPM) for budget neutrality[58][59] Human Capital Management - As of February 1, 2023, the company had 52 employees, none subject to a collective bargaining agreement[80] - The company reinforced its commitment to diversity and inclusion by signing the CEO Action for Diversity and Inclusion Pledge and expanding recruitment practices[81] Risk Factors The company faces risks from operator financial health, government reimbursement reliance, COVID-19 impacts, capital dependency, and maintaining REIT tax status Risks Related to the Operators of Our Facilities - The company's financial position is highly dependent on operators' ability to meet lease and loan obligations, with bankruptcy or insolvency potentially limiting investment recovery[89][90] - Operators are heavily reliant on Medicare and Medicaid reimbursement, and rate reductions could adversely affect their financial condition and payment ability to Omega[97] - Increased operating costs for operators, particularly labor shortages and wage increases exacerbated by the COVID-19 pandemic, may affect their ability to meet obligations[103] - Inflation could adversely impact operators if operating expense increases exceed reimbursement increases, potentially affecting their ability to pay rent and other obligations[105] Risks Related to Us and Our Operations - The COVID-19 pandemic has materially and adversely affected operators through lower occupancy, increased expenses, and staffing shortages, with the public health emergency termination on May 11, 2023, adding uncertainty[111][113] - As a REIT, the company must distribute at least 90% of its taxable income, requiring reliance on external debt and equity capital for future growth and to meet maturing commitments[119] - The company's assets are concentrated in the long-term care industry, with largest state concentrations in Florida (11.5%), Texas (10.3%), and Indiana (6.6%) as of December 31, 2022[139] - Investments in the U.K. subject the company to risks including currency fluctuations (USD vs. GBP) and changes in foreign political, regulatory, and economic conditions, such as those related to Brexit[137][138] Risks Related to Taxation - Failure to qualify as a REIT would subject the company to federal corporate income tax, significantly reducing net earnings and cash flow, and impairing its ability to expand and make distributions[142][143] - To maintain REIT status, the company must distribute at least 90% of its taxable income annually, potentially requiring asset sales in adverse market conditions or borrowing on unfavorable terms if funds are not readily available[144] Properties Omega's real estate portfolio includes 926 facilities across 42 states and the U.K., concentrated in Florida, Texas, and Indiana Top 5 State/Country Concentrations by Gross Investment (as of Dec 31, 2022, in millions USD) | Location | Number of Facilities | Gross Investment | % of Gross Investment | | :--- | :--- | :--- | :--- | | Florida | 98 | $1,104.4 | 11.5% | | Texas | 111 | $987.5 | 10.3% | | Indiana | 70 | $638.3 | 6.6% | | California | 52 | $568.7 | 5.9% | | Ohio | 43 | $541.4 | 5.6% | Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 20—Commitments and Contingencies to the Consolidated Financial Statements - The company refers to Note 20 of its Consolidated Financial Statements for details on legal proceedings[155] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Omega's common stock trades on NYSE as OHI; in 2022, the company repurchased 5.2 million shares for $142.3 million under a $500 million program - In January 2022, the Board authorized a repurchase program for up to $500 million of common stock through March 2025[162] - During 2022, Omega repurchased 5.2 million shares of common stock at an average price of $27.32 per share, for an aggregate cost of $142.3 million[162] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses COVID-19's adverse impact on operators, leading to revenue decreases and collectibility issues, offset by portfolio optimization and strong liquidity Outlook, Trends and Other Conditions - The COVID-19 pandemic continues to significantly impact operators through reduced occupancy, labor shortages, and increased costs, leading to payment failures, deferrals, and restructurings[171] - Occupancy has improved since early 2021 but has not returned to pre-pandemic levels, partly due to staffing shortages limiting admissions[175] - The phase-out of the 6.2% FMAP reimbursement in 2023 and the scheduled expiration of the public health emergency on May 11, 2023, create significant uncertainty regarding future government support for operators[176] 2022 and Recent Highlights - Acquired 41 facilities for $225.2 million with initial cash yields between 8% and 9.5%[181] - Sold 66 facilities for approximately $759.0 million in net cash proceeds, recognizing a net gain of about $360.0 million, primarily driven by restructuring transactions with operators like Gulf Coast, Guardian, and Agemo[183] - Repurchased 5.2 million shares of common stock for $142.3 million at an average price of $27.32 per share[183] - Placed nine operators on a cash basis of revenue recognition during 2022, resulting in $119.8 million in straight-line accounts receivable write-offs; as of year-end, 20 operators representing 36.5% of total revenues were on a cash basis[187] - Quarterly cash dividends paid during 2022 aggregated to $2.68 per share[189] Results of Operations Comparison of Results of Operations (2022 vs 2021, in millions USD) | | 2022 | 2021 | Increase/(Decrease) | | :--- | :--- | :--- | :--- | | Revenues: | | | | | Rental income | $750.2 | $923.7 | $(173.5) | | Interest income | $123.9 | $136.4 | $(12.5) | | Expenses: | | | | | Depreciation and amortization | $332.4 | $342.0 | $(9.6) | | Provision for credit losses | $68.7 | $77.7 | $(9.1) | | Other Income (Expense): | | | | | Gain on assets sold – net | $360.0 | $161.6 | $198.3 | - The decrease in rental income was primarily due to an $85.7 million increase in straight-line rent write-offs and a $67.2 million net decrease in income from 13 cash basis operators[192] - The increase in gain on assets sold was driven by the sale of 66 facilities in 2022 compared to 48 in 2021, as part of portfolio optimization efforts[194] Funds From Operations Nareit FFO Reconciliation (in millions USD) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net income | $438.8 | $428.3 | $163.5 | | Nareit FFO | $460.5 | $655.2 | $555.9 | - Nareit FFO decreased by $194.7 million in 2022 compared to 2021, primarily driven by the overall decrease in total revenue[202] Liquidity and Capital Resources Capital Structure (as of Dec 31, 2022) | Metric | Value | | :--- | :--- | | Total Assets | $9.4 billion | | Total Debt | $5.3 billion | | Total Equity | $3.8 billion | | Debt to Total Capitalization | 58.4% | - As of December 31, 2022, 98% of the company's debt had fixed interest payments, with a weighted-average annual interest rate of 4.1%[206] Cash Flow Summary (in millions USD) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $625.7 | $722.1 | | Net cash provided by (used in) investing activities | $442.9 | $(524.2) | | Net cash used in financing activities | $(789.4) | $(341.1) | Critical Accounting Policies and Estimates - Revenue Recognition: The assessment of placing an operator on a cash basis for revenue recognition is a critical estimate, leading to approximately $119.8 million in receivables and lease inducements write-offs in 2022[226] - Real Estate Investment Impairment: Assessing impairment involves significant judgment; in 2022, the company recorded impairments of approximately $38.5 million on 22 facilities[226] - Allowance for Credit Losses: The company uses a probability of default (PD) and loss given default (LGD) methodology, recording a provision for credit losses of approximately $68.7 million in 2022[227] Quantitative and Qualitative Disclosures About Market Risk Omega is exposed to market risks from interest rate and foreign currency fluctuations, mitigated by fixed-rate debt and derivatives, with a 1% interest rate increase impacting fixed-rate debt by $212.0 million - A one percent increase in interest rates would decrease the fair value of long-term fixed-rate borrowings by approximately $212.0 million at December 31, 2022[230] - The company is exposed to foreign currency risk through its U.K. investments; a 10% change in the GBP/USD exchange rate would impact net income from consolidated U.K. investments by approximately $1.4 million based on 2022 results[232] - To hedge its U.K. net investments, the company holds six foreign currency forward contracts with notional amounts totaling £250.0 million as of December 31, 2022[233] Financial Statements and Supplementary Data This section presents the company's consolidated financial statements for fiscal year 2022, including key statements, accompanying notes, and the independent auditor's report - The consolidated financial statements and the report of Ernst & Young LLP, Independent Registered Public Accounting Firm, are filed as part of this report[234] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, affirmed by an unqualified auditor opinion - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[236] - Management assessed internal control over financial reporting using the COSO framework and concluded it was effective as of December 31, 2022[239] PART III Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees Information required for Items 10 through 14, covering directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, and principal accountant fees, is incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2023 proxy statement[245][247][248][252][253] PART IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements, schedules, and exhibits filed with the Form 10-K, including auditor reports and real estate schedules - This section contains the listing of all financial statements, schedules, and exhibits filed with the annual report[255][256]