Omega Healthcare Investors just provided an operator update, and the REIT will be working through some lingering problems for at least another year, if not longer. Perhaps the biggest problem remains Maplewood Senior Living, a Connecticut-based provider of assisted living and memory care services that is located about 10 miles from our Connecticut HQ. We tried to reach out to the founder several years ago, trying to be “neighborly,” but our efforts were ignored. Maybe they could have received some good advice.
The company’s initial developments were on Connecticut’s Gold Coast, in the high-income neighborhoods of Fairfield County. Now, these areas are known to be high-barrier-to-entry neighborhoods, with a lot of Nimbyism, but competitors soon followed. Maplewood’s communities are well-appointed, but when we toured the Darien community shortly after its opening, we were a bit surprised by the dining room. Each setting had three different glasses and too many forks, knives and spoons to count. We asked how a memory resident would deal with this, and the response was that this is what their residents were used to at their prior homes. Really? We live in the neighborhood as well, and no one we know dines like that at home. It just seemed a bit overdone, which is becoming one of the problems with the seniors housing industry: too much for show for a lot of dough. But we digress.
Maplewood now operates 17 communities owned by Omega, and while the real estate is still top-of-the line, problems really escalated for Maplewood when they expanded into New York City’s Upper East Side at a very high price point. That also ended up being way over budget. With expected rents of $18,000 to $25,000 shocking others in the industry, Manhattan really had little to offer seniors, and there were a lot of wealthy ones who would benefit from a move. We toured one competitor’s community on the West Side that we thought of as rather “dumpy” that was getting rents well in excess of $10,000 per month. And that was for mostly independent living. The market was wide open. And then COVID and lockdowns hit. And then costs rose.
In addition to owning and leasing 17 communities, Omega provided $250.5 million in a secured revolving credit facility at 7%. Interest payments have been paid in kind, and cash interest payments are to be phased in beginning in 2024. This credit facility will also be increased by $13 million to support liquidity needs for the Manhattan project as well as a new one in Princeton, New Jersey. On the main lease, rent escalators have been deferred through 2025. Annual cash rent through 2025 will be about $69.2 million, or just over cash rents received in 2022 of $68.4 million.
Under the legacy lease agreement, in the event of a sale, Maplewood is entitled to a portion of the sales proceeds in excess of Omega’s gross investment. Omega management believes that the value of the portfolio “significantly” exceeds its gross investment, but the times they are a changing. We heard a few years back that a sale was in the works, but that did not pan out. The good news is that these 17 properties are in great markets with legs, so other than new problems arising, in time, census should rise and costs normalize. We know, famous last words.
Omega is working through some continuing issues with SNF operator LaVie, formerly known as Consulate, including the sale of 11 properties at the end of 2022 for $129.8 million, with seller financing of $104.8 million at 8%. Management stated that there will likely be more sales in the coming months. We call this “long-COVID,” and Omega is not alone.
