Omega Healthcare Investors(OHI) - 2023 Q2 - Quarterly Report

PART I - Financial Information Item 1. Financial Statements This section presents Omega Healthcare Investors, Inc.'s unaudited consolidated financial statements as of June 30, 2023, and for the three and six months then ended, covering Balance Sheets, Statements of Operations, Comprehensive Income, Equity, and Cash Flows, alongside detailed accounting policy notes Consolidated Balance Sheets As of June 30, 2023, Omega's total assets were approximately $9.404 billion, nearly unchanged from $9.405 billion at December 31, 2022, with total liabilities decreasing slightly to $5.591 billion and total equity increasing to $3.813 billion over the same period Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $9,404,033 | $9,405,163 | | Real estate assets – net | $6,489,376 | $6,537,491 | | Real estate loans receivable – net | $1,096,806 | $1,042,731 | | Cash and cash equivalents | $350,691 | $297,103 | | Total Liabilities | $5,591,441 | $5,601,881 | | Senior notes and other unsecured borrowings – net | $4,905,761 | $4,900,992 | | Total Equity | $3,812,592 | $3,803,282 | Consolidated Statements of Operations For Q2 2023, total revenues were $250.2 million and net income was $61.5 million, while for the six months ended June 30, 2023, revenues reached $468.4 million and net income was $98.4 million, a significant decrease from the prior year primarily due to lower gain on assets sold Key Operating Results (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $250,187 | $244,649 | $468,389 | $493,964 | | Rental income | $219,101 | $211,428 | $408,178 | $428,311 | | Impairment on real estate properties | $21,114 | $7,695 | $60,102 | $11,206 | | Gain on assets sold – net | $12,243 | $25,180 | $25,880 | $138,817 | | Net Income | $61,521 | $91,915 | $98,366 | $287,071 | | Diluted EPS | $0.25 | $0.38 | $0.40 | $1.17 | Consolidated Statements of Cash Flows For the six months ended June 30, 2023, net cash provided by operating activities decreased to $281.7 million, while investing activities shifted to a net use of $184.7 million due to lower asset sale proceeds, and financing activities saw a reduced net use of $41.7 million primarily from increased stock issuance and fewer repurchases Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $281,736 | $305,196 | | Net cash (used in) provided by investing activities | $(184,669) | $277,166 | | Net cash used in financing activities | $(41,685) | $(436,756) | | Increase in cash, cash equivalents and restricted cash | $55,867 | $144,053 | Notes to Consolidated Financial Statements These notes provide detailed information on the company's accounting policies and financial activities, covering operator collectibility issues, rent deferrals, restructurings, real estate transactions, loan portfolio, debt structure, hedging, and legal proceedings - The company's core business is providing financing and capital to the long-term healthcare industry, focusing on skilled nursing facilities (SNFs) and assisted living facilities (ALFs) in the U.S. and U.K. through triple-net leases and real estate loans[23] - As of June 30, 2023, 18 operators were on a cash basis for revenue recognition, representing 25.8% of total revenues for the first six months of 2023[49] - During the first six months of 2023, the company allowed nine operators to defer $33.6 million of contractual rent and interest, primarily related to LaVie ($19.0M), Healthcare Homes ($8.2M), and Agemo ($1.9M)[50] - On August 1, 2023, the company repaid its $350 million of 4.375% senior notes that matured on that date using available cash[154] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operating results, emphasizing ongoing operator challenges such as labor shortages, occupancy recovery, and the phase-out of government pandemic support, alongside collectibility issues, portfolio restructurings, investment activities, liquidity, and quarterly performance analysis Outlook, Trends and Other Conditions The company remains cautious due to significant post-pandemic challenges impacting operators, including persistent labor shortages, elevated costs, slow occupancy recovery, and uncertainty regarding Medicare and Medicaid reimbursement rates, further pressured by the May 11, 2023, expiration of the public health emergency and associated financial support - Operators continue to be significantly impacted by post-pandemic effects, including occupancy declines, labor shortages, and cost increases, leading to several operators failing to make contractual payments[162] - The federally declared public health emergency expired on May 11, 2023, discontinuing waivers like 'skilling in place' and phasing out the additional 6.2% FMAP reimbursement, which may adversely affect operators' finances[163][166] - Average occupancy in facilities has improved since early 2021 but has not returned to pre-pandemic levels, partly due to staffing shortages limiting admissions[165] Government Regulation and Reimbursement This section details the complex regulatory landscape for healthcare operators, highlighting the end of the COVID-19 public health emergency, phase-out of enhanced FMAP, a projected 4.0% net increase in Medicare payments for FY 2024, and potential new burdens from minimum staffing requirements and proposed REIT ownership disclosure rules - The expiration of the public health emergency on May 11, 2023, ended temporary regulatory waivers, including the suspension of the three-day prior hospital stay requirement for Medicare coverage[174] - CMS issued a final rule for FY 2024 projecting a net 4.0% ($1.4 billion) increase in Medicare Part A payments to SNFs, which includes a 6.4% market basket update offset by a 2.3% PDPM parity adjustment recalibration[190] - The Biden Administration is considering implementing federal minimum staffing requirements for nursing homes, which, if unfunded, could have a material adverse impact on operators' financial condition[183] - CMS proposed a rule in February 2023 that would require SNFs to disclose information about entities like REITs that lease real estate to them, citing concerns about quality of care at facilities owned by investment firms[185] Second Quarter of 2023 and Recent Highlights In Q2 2023, Omega acquired five facilities for $128.6 million and sold ten for $44.7 million, recording $21.1 million in impairments, while financially issuing 6.6 million shares for $201.6 million and receiving a $92.6 million cash settlement from swap terminations, amidst ongoing operator issues with LaVie and Maplewood - Acquired 5 facilities for $128.6M and sold 10 facilities for $44.7M in net proceeds during Q2 2023[197] - Issued 6.6 million shares of common stock under its ATM and DRSPP programs, generating $201.6 million in gross proceeds[199] - Terminated five forward starting swaps, receiving a $92.6 million net cash settlement[199] - Operator Maplewood short-paid rent by $1.0 million in both June and July 2023, and operator LaVie short-paid July 2023 rent by $4.7 million[203] Results of Operations For Q2 2023, rental income increased by $7.7 million and impairments rose to $21.1 million, while for the six-month period, rental income decreased by $20.1 million, primarily due to lower revenue from cash-basis operators and a $12.5 million option termination payment Comparison of Operating Results (in thousands) | Account | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Rental income | $219,101 | $211,428 | $7,673 | | Interest income | $29,232 | $31,374 | $(2,142) | | Impairment on real estate properties | $21,114 | $7,695 | $13,419 | | Gain on assets sold – net | $12,243 | $25,180 | $(12,937) | - The Q2 2023 increase in rental income was driven by a $9.5M decrease in straight-line rent write-offs and $7.1M from acquisitions, partially offset by a $12.0M decrease from cash basis operators[206] - The six-month decrease in rental income was primarily due to a $46.3M net decrease from cash basis operators (including a $12.5M termination payment to Maplewood), partially offset by fewer write-offs and acquisition-related income[210] Funds from Operations Nareit FFO, a key performance measure, was $155.2 million for Q2 2023 and $301.2 million for the six months ended June 30, 2023, representing decreases from the prior-year periods Nareit FFO Reconciliation (in thousands) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income | $61,521 | $91,915 | $98,366 | $287,071 | | Adjustments (Gains, Depreciation, Impairments) | $93,632 | $68,710 | $202,859 | $44,232 | | Nareit FFO | $155,153 | $160,625 | $301,225 | $331,303 | Liquidity and Capital Resources As of June 30, 2023, Omega had $5.3 billion in total debt (58.3% of capitalization, 99% fixed-rate), $356.5 million in cash, and $1.43 billion available under its revolving credit facility, having raised $203.9 million through equity programs and subsequently repaid $350 million in senior notes - As of June 30, 2023, total debt was $5.3 billion, with a weighted average annual interest rate of 4.2%, and 99% of this debt has fixed interest payments[219][220] - The company had $1.43 billion of availability under its revolving credit facility and $730.5 million remaining under its ATM Program as of June 30, 2023[221][222][227] - On August 1, 2023, the company repaid $350 million of 4.375% senior notes using available cash[221] Cash Flow Summary Comparison (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Operating activities | $281,736 | $305,196 | | Investing activities | $(184,669) | $277,166 | | Financing activities | $(41,685) | $(436,756) | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that there were no material changes in its primary market risk exposures or the management of those exposures during the quarter ended June 30, 2023, compared to what was disclosed in its 2022 Annual Report on Form 10-K - There were no material changes in the company's primary market risk exposures or how those exposures are managed during the quarter[240] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting identified during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[243] - No material changes to the company's internal control over financial reporting were identified during the quarter[244] PART II - Other Information Item 1. Legal Proceedings This section incorporates by reference legal proceedings detailed in Note 18 of the Consolidated Financial Statements, including the settlement of a shareholder class action lawsuit and related ongoing derivative actions - The company refers to Note 18 for details on legal proceedings, which discusses the settlement of a securities class action lawsuit in Q2 2023 and other ongoing litigation[140][245] Item 1A. Risk Factors The company reports that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to risk factors were reported since the company's 2022 Annual Report on Form 10-K[246] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2023, Omega issued 17,839 common shares in exchange for Omega OP Units via private placements, while no shares were repurchased under its authorized $500 million program - In Q2 2023, the company issued 17,839 shares of common stock in exchange for an equal number of Omega OP Units[247] - No shares were repurchased during the second quarter of 2023 under the company's stock repurchase program[249] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to credit agreements, CEO and CFO certifications, and the Inline XBRL data files - Exhibits filed include amendments to credit agreements to conform to reference rate reform (SOFR), CEO/CFO certifications, and XBRL data[250]