Q2 2023 Omega Healthcare Investors Inc Earnings Call
All lines have been placed on a listen only mode and the floor will be open for questions and comments following the presentation.
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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're on mute.
Thank you and good morning, with me today Omega CEO Taylor Pickett.
Dan.
CFO , Bob Stephenson, and Megan Kroll 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 restructuring rent payments financial condition or prospects of our operators contemplated acquisitions dispositions or transitions and our business and portfolio outlook generally.
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.
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 <unk> adjusted <unk> Fad and EBITDA reconciliations of these non-GAAP measures to the most 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 web.
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'll now turn the call over to Taylor.
Thanks, Michele good morning, and thank you for joining us for our second quarter 2023 earnings call.
Today, I'll discuss our second quarter financial results and certain key operating trends.
Second quarter Fad funds available for distribution of <unk> 70 per share significantly exceeded the first quarter Fad or <unk> 60 per share comfortably ahead of our 67 a share dividend.
The fad dividend payout ratio is 96%.
The large increase in Fad was primarily due to the resumption or decrease in rents cash basis operators, one operator will be paid partial rent April .
Rent in May and June .
Which resulted in a three asset increase and flat quarter over quarter.
As Dan will discuss.
He is still being restructured and we havent reached partial rent payments of $2 5 million per month for the third quarter.
Which will reduce that by three five cents from Q2 Q3.
When there will be restructuring is completed we expect a significant increase in cash rents from our current agreed upon partial rent payments.
In addition, during the second quarter, we issued six 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 turning.
Turning to positive operating trends.
First quarter EBITDAR coverage, excluding cares act support continues to improve increasing to 115 times.
Versus 1.09 times in the prior quarter.
This level of coverage reflects continued occupancy improvement.
Strong state reimbursement rates and some moderation in the still difficult labor market.
Under one zero times EBITDAR operators represent 29, 9% of total rent.
We can break the 29, 9% into a handful of buckets.
Operators, representing six 2% of the 29, 9% are sitting on extremely strong balance sheets, and therefore payment of rent it should not be an issue.
Operators, representing eight 1%.
First quarter EBITDAR coverage above 1.0 times.
99, 5% represents.
So these first quarter EBITDAR coverage.
Excluding the anticipated sale or transition of 23 facilities is also about 1.0 times.
That lease operators, representing six 1%.
Of which operators representing three 5% are in active restructurings.
Recently transitioned.
Which leaves a balance of $2 six representing eight 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.
Year over year increase was primarily the result of timing related to operator restructuring.
Revenue from new investments completed in 2022 and.
Our NAREIT <unk> for the second quarter was $155 million or <unk> 63 per share as compared to $161 million or.
<unk> 66 per share for the second quarter of 2022.
74 per share for the quarter, and our Fad was $173 million or <unk> 70 per share and both excludes several items consistent with historical practices.
Allied and our adjusted <unk> 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 70 cents, a fad for the second quarter with Tencent is greater than our first quarter. Fad. This increase was primarily driven by incremental revenue from 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.
Close to $270 million in new investments.
Second quarter new investments.
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.
A number of operators on a cash basis for revenue recognition <unk>.
Including Levy, which is projected at $2 $5 million per month.
We will only report fad from are up from our cash based operators to the extent payments are received or security deposits are applied.
It is 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 .
Leach pad it is negative and is negatively impacted by approximately $1 five per share until the cash is put back to work in new investments.
Q4, Fad payout ratio so approximately cover our 67% dividend with a path to return to a normalized payout ratio.
<unk> to low <unk> in 2024.
Our balance sheet continues to remain strong in the second quarter, we issued $6 6 million shares.
$200 million of equity and we also terminated our $400 million.
And treasury locks, which generated $93 million of cash gain leaving us with $350 million in cash at June 30.
On August <unk>, we use the balance we use the balance sheet cash to repay the $350 million bond maturity.
Looking forward based on the current capital markets, our active pipeline and an April one 2020 for $400 million bond maturity, we expect to continue to be opportunistic in the equity capital markets, while targeting leverage in the low fives.
June 30, 99% of our $5 3 billion and debt was at fixed rates and our net funded debt to annualized adjusted normalized EBITDA was five one times and our fixed charge coverage ratio was four one times.
I'll now turn the call over to Dan.
Thanks, Bob and good morning, everyone.
As of June 32023, Omega had an operating asset portfolio of 893 facilities with approximately 88000 operating beds.
These facilities were spread across 66 third party operators and located within 42 states and the United Kingdom.
Trailing 12 month, operator, EBITDAR coverage for our core portfolio as of March 31, 2023 increased to one one times versus one four times for the trailing 12 month period ended December 31.
2022.
During the first quarter of 2023 operators chemo every quarter at approximately $5 8 million and.
And 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 one two times as compared to <unk> 92 times for the call.
For the fourth quarter, when excluding the benefit of any federal stimulus funds.
EBITDAR coverage for the Standalone quarter ended March 31, 2023 workout portfolio was one eight times, including federal stimulus and 115 times, excluding the $5 $8 million of federal student as pumps.
This compares favorably to the Standalone fourth quarter of $1, one nine times, and one nine times with and without the $29 and federal stimulus bonds 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 Libbey as previously mentioned Omega entity 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 re leasing an additional 23 facilities most of which are expected to be transferred throughout the fourth quarter of 2023.
During the second quarter of 2023 will be 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 it to be short pay rent by approximately 66% during the third quarter of 2023.
Maplewood in the second quarter, maybe what short paid its contractual June to July rent by $1 million per month.
We currently are working with Maplewood and the state of <unk> Smith to address these shortfalls.
Just on Maplewood latest cash flow projections, which incorporate anticipated January rate increases and improved census at the second Avenue facility in Manhattan.
We believe there is a path forward to meet its full contractual rental obligations in the first quarter of 2024.
In August we drew on our $4 8 million security deposit and we will be applying the security deposit 20 rental shortfalls realized in the third quarter.
In addition to the aforementioned restructuring and transitions Omega is working with several other relatively small operators on various restructurings.
Turning to new investments as previously announced on April 14 2023.
Omega closed on a $219 million or transaction, which consisted of $114 8 million purchase lease transaction for <unk>.
Four facilities in West, Virginia, and a $104 6 million.
<unk> financing.
Currently with these acquisitions.
Omega amended an existing operator's master lease to include the four facilities and at an initial cash yield of nine 5% with two 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 one of 2023 Omega purchased one additional facility in West Virginia for $13 $7 million.
He was added to an existing operator's master lease with an initial cash yield of 10% with two 5% annual escalators.
Additionally, on June 30 of 2023.
Mega 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 our 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 closed on a $313 million of new investments, including $29 million and capital expenditures.
Turning to dispositions during the second quarter of 2023, Omega divested 10 facilities for a total of $45 million of impressions year.
Year to date Omega has divested 12 facilities for a total of $62 million.
Yes.
I will now turn the call over to Megan Thanks, Dan and good morning, everyone.
We continue to see slow positive momentum in occupancy the number of facilities not recovered at 35% up slightly from the 33, 3% reported in the fourth quarter. Additionally.
Additionally, 25% of port facilities that are not yet fully recovered.
At or above 4% occupancy.
Staffing shortages, while continuing to moderate percent.
Overall recovery and continuing to vary by market.
And Jan aka released the results survey of 425 nursing health providers results of which showed that 52% are still limiting your admission staffing shortages.
Agency expense on a per patient day basis for our core portfolio.
First quarter 2023 remained at five times, where it was in 2019, which was consistent with last quarter did show modest month over month improvement.
Helping to offset some of these persistent expense increase.
Resetting front just this week CMS issued its final 2020 for payment rule.
Resulting in a net increase of 4% or approximately $1 $4 billion, which is slightly better than the three 7% provided for in the perpetual.
This included a six 4% of net market basket update consisting of a 3% market basket increase.
Three 6% market basket forecast error adjustment.
Offset by a 2% productivity adjustment as well as the remaining two 3% PDP at parity adjustment Recalibration.
And on the state side, while the magnitude of certain states certain rate increases it's not exactly what we would hope for in certain areas. It is still moving in the right direction.
Texas of note provided for at least the $19 63.
To be included and it's permanent rate setting learning curve.
In addition to a small increase above that.
Florida provided for up to 5% range starting October 1st.
While much of the Florida rate is based on quality indicators that not all operators will see this mark spent increase it does represent somewhat of a trend and rate setting 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 will now open the call up for questions.
A few question has been answered you can remove yourself from the queue by pressing one again, ladies and gentlemen, Thats star one.
Hey, good morning, everyone. So.
<unk> was a positive surprise this quarter I appreciate the color on the three five stepped out for the next quarter. I think there are a few additional puts and takes for the next quarter I think maplewood was.
I would say is Paul I think you hit on the only other components to look at I didn't I did mentioned the incremental revenue related to acquisitions completed in the quarter and it also Taylor and I. Both mentioned that the shares issued were issued late in the quarter. So youre going to have some.
Modest.
Impact based on the weighted average shares.
Yeah.
Okay.
And just one follow up we got to the 4% Medicare rate update earlier this week and thanks for the comments about Texas and.
Florida, I think California is also pretty well know what I'm just wondering if you could walk us through some of your other big markets. For example, Indiana, North Carolina, Pennsylvania, Naturals, and what are you seeing those states in terms of the 2020 for Medicaid reimbursement rates.
Yes, some of them are a little bit too early to tell Indiana I think that there are still hoping for an inflationary increase somewhere in the 3% to 4% range now finalized quite yet.
But remember in Indiana, we've got the reality is though that Medicaid rate setting doesn't necessarily impact our comp against the same way.
Pennsylvania I think.
There was a little bit of a rate reduction actually in July .
I'll add to that there was a budget factor rate decrease related to the January 1st increase.
We'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 are pretty well set for the moment.
And then North Carolina, and that's why we've really been watching it and they were supposed to.
They thought they would get their budgets approved earlier, but they haven't yet.
Yes.
$37, Pts snap AD on shaping trying to get into that range.
But you think likely.
Likely to happen that the operators are software at the moment.
Nate has pushed that $35 or most of it out at least through August right now until they finalize the budget, but they are hopeful that they get that put in.
Yeah.
Thank you as a reminder, please ask one question and one follow up question. Our next question comes from Jonathan Hughes from Raymond.
Raymond James go ahead Jonathan.
Hi, good morning, Thanks for the time.
I was hoping you could dig a little deeper on would be I know that restructuring has been ongoing for some time now and that they may pay more rent than expected to may June but I.
I guess why did they pay more rent if they didn't necessarily have to.
Okay.
Really boils down to cash on hand that they were a little bit more liquid in the second quarter than anticipated and so they were able to make the full rent out rent payments for for May and June .
We've got some transitions coming up so the expectation is that they're 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 is a lot of third parties that we have no control over so.
The expectation is for at least for right now as the third quarter, we will see that reduce rent amount.
Yeah.
Okay.
And then maybe my follow up.
Realize we're still.
Waiting on this but any user updated expectations just from the staffing mandate that we've all been waiting for it for a few months now.
I think one of the operators that hopefully gathered by the end of the month, but just any any views there would be helpful. Thanks.
Honestly, we don't have that crystal ball at the moment I mean, we hear the same things that I'm sure you guys. Here I think we view the fact that this hasn't come out yet despite the fact that it should come out in April at the positive. That's hopefully CMS has gotten a ton of comments related to that in terms of.
Don't have a one size fits all Mandy.
Hopefully pushed out until there isn't a staffing crisis.
They'll take a balanced approach based on how long there, but we still have to put 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. So theres going to be a comment period. So aka has historically been very good at getting.
More beneficial than when it first comes out of it.
Thank you and our next question comes from Connor Silver ski from Wells Fargo go ahead.
Good morning, Thanks for having me on the call.
I would like to dig into maplewood.
And apologies if I missed this debt remarks, but could you quantify at all what that 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 where it differently I mean, how much EBITDA can we see from second half how much rate increases and do you think that would cover the rent shortfall.
Yes.
I'm going to make this a relatively longer answer Conor just because I think the context is important. So if you look at maple wood as a whole.
The core portfolio, excluding second Avenue is performing very well.
Occupancy is at pre Covid levels.
We have significant cash flow.
When you look at second Avenue.
It just didn't fill up 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 acre incremental occupancy so from a 131 residence to 151 by year end.
And obviously that has a lot of.
Power in terms of cash to the bottom line.
On the flip side rate increases happen typically in January .
So you do have whatever inflationary impact between now and the end of the year.
That will cut it 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 billion deficit, we're seeing today.
But then just to close the loop on the rate increase piece of the puzzle.
<unk> total revenue it was about $200 million. So when you think about last year's rate increases for sure.
High single low double digit.
With the expectation in the industry have something similar for high end properties.
That's a really meaningful in terms of the amount of top line revenue.
Cash deficit we have today.
So.
Long answer to your question, but I think that context is important.
Yeah.
Great I appreciate the color Taylor that's helpful. And then just as it relates to the line of credit and building deferral balance I mean, what is the total tab to OE look like currently.
Big do you expect that to get and then is there a threshold that you 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 at that line I remember we have.
Interest debt.
We are 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.
Great. Thank you I'll hop back in the queue.
And our next question comes from Michael <unk> from Citi Go ahead Michael.
Great. Thanks, 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 and expectations for the back half of the year and kind of where do you need to see occupancy gets you to really ease a lot of those labor pressures.
And then from an agency perspective, it's definitely improving that's what we're hearing anecdotally from our operators on certain operators are able to get out of it but it's really geographically based.
Florida tends to be one of the states, having severe staffing shortages or it really just depends on where you are.
And in terms of occupancy, we always talk about that nationally, 84% and getting back up close generically more close to 80%.
With agency still high.
Just need to work through some of the staffing issues.
All of this problem.
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 you know can you quantify maybe that opportunity set and where yields have gone 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 both.
Here in the states and abroad in the U K I'd say the U K is particularly active.
I think what we've done year to date.
It's pretty good proxy for what we hope to do in the neck.
<unk>.
Later half of the year.
These are big piece, obviously, we talked about that we're fixing that.
But then you have another significant piece of that one O that we have pretty good visibility and thats going to climb out of that debt below one bucket.
And then you get back to.
So the handful of operators.
Not a lot of visibility there is small it is.
Under 3%.
And that's where we've run historically for many many years. So I think there is a pathway of Leslie.
We get that below one times bucket is going to take a little while.
Where we climb out of that bucket and get back into.
It is.
Less than 5%.
Of our portfolio there.
It's not going be next quarter, but we have some visibility.
Thats pretty good.
Okay awesome.
Maybe just.
Good day.
The part of the bucket that you expect to climb out of that.
Any kind of timeframe on that is it.
<unk>.
Yes, I guess, maybe just timeframe I'm trying to think through it.
Well I think I gave the big two examples well he.
He is just subject to finishing the restructuring.
And as Dan mentioned, it's taken longer than any of us.
Neither side of.
Restructuring table, but it will happen this year.
And then you have eight 1%.
They are running currently above one times.
So that's just a question in terms of how we report waiting for the trailing 12 months to catch up so you've got almost you've got almost 18%.
There are those two buckets that you have some restructuring activity so.
So I think a lot of this will have.
Reporting visibility going into Q1 that will make a lot of people more comfortable.
Yes.
Okay, great. Thank you.
Thank you and our next question comes from Steve <unk> from Barclays Go ahead, Steve.
Okay.
Hi, This is <unk> on for Steve Valiquette.
First question would be.
Just wanted to kind of get a sense of.
How the ending of the Phe back in May has.
June July for most recently, let's say.
Just to kind of quantify it.
Any sense of how that.
<unk>.
It's been impacted and then.
Just also wanted to kind of touch on the previous question.
Assuming all of these 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 one times down to that 20%.
90% range and just to.
Confirm that Liberty is the operator.
Closest to being fully restructured thank you.
So the public health emergency I would say there hasn't been a very large impact obviously.
When you place is gone, but a lot of that was kind of tapered off anyway.
The other piece of it is really not because of which you know we've gone over some of these states.
Got it.
And most of that on the California put that through the end of the year and hopefully next year that will get added on permanently Texas.
To have their ethanol right in there in their permanent rate as well.
Most of these states have either downloads that are about to deal with it.
I'd say not much of an impact at this point.
Then the second half the question Josh Levine.
The 95% of the $29 nine so when levees restructured here call it 20%.
And then you have.
The two buckets of operators with strong very very strong balance sheet.
Six 2%.
And then you have the eight 1% bucket of operators had Q1 EBITDAR above one times. So that's another 14%.
And I think we'll have visibility around all of that again, not next quarter, but in the pipe.
By the time, we roll into 2024, I think we got very good visibility.
That gets you down to 6% and were working.
A big chunk of that 6% so the number should be.
Alright Super quickly 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.
What we're restructuring which.
Other than the restructuring around lavie, we don't have anything big out there.
Alright, thanks, so much for the color I appreciate it.
Vikram.
<unk> from Mizuho go ahead.
Thanks for taking the question.
Maybe just first one I wanted to clarify you mentioned the share count impacting.
Maybe the <unk> Fad run rate I, just wanted to clarify it remind me last quarter I talked you had said you were hoping to hit sort of a 70 has been.
That number by four Q.
And I think now you're saying, you're probably more approximating the dividend is it just the shares.
To clarify just the capital raise and nothing else on the tenant front that you're baking into get to that 80% coverage in 2024.
Well the shares absolutely have an impact.
And again getting in 2024, it's also getting levee restructure is a big piece of that as well.
Yeah.
Okay. That's helpful. And then just thinking about the outcome eventually up.
The minimum stopping rule.
Whenever it come I'm, just wondering if you sort of looked at.
A couple of scenarios, where they they require sort of a $4 one but the timeline maybe sooner than you anticipated.
The relatively long period to adhere to the standard.
Call it negative scenario.
You have done on our coverages may be impacted for operators.
You know we haven't just because it's way too soon given that nothing has come out yet and we think that you probably comes out.
Total cholesterol tomorrow, you probably wouldn't have it come into place it could next year right and so.
But we're hopeful it gets pushed out in time.
Staffing shortages in Peru, but there.
There is really no good way to drill down into that channel.
Put out something saying that he had $4 one it would cost the interesting thing like $10 billion.
But to get there I mean, it's really difficult to figure out how that would affect the operators on a daily basis. They can't do something so draconian that it puts everybody out of business.
Got it makes sense. Thank you.
Okay.
And our next question comes from Wes Golladay from Bard go ahead WAF.
Good morning, everyone. A quick question on the on the staffing I guess what is the dynamic. There is there are you seeing lower turnover or is it 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 it.
Lowering the turnover certainly.
Net finance that's out there I think the turnover is getting better and I think there's also some operators who've been successful with bringing.
Helpful.
Okay, 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 you. If you were to roll that gain into a new offering it could reduce your interest expense so maybe the accounting behind that.
Yes, basically we have.
Thanks, everybody for joining us today as always we're available for any follow up questions have a great day.
Thank you. This does conclude today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Okay.
[music].
Okay.
Yes.
Thanks.
Okay.