Omega Healthcare Investors, which is approximately 75% skilled nursing and 25% seniors housing, and the largest institutional owner of SNFs, reported a mixed third quarter. While, the financial performance exceeded management’s expectations with unanticipated rent collections from some operators that had been on a cash basis, as well as higher interest income than expected, there were also some problems that will have to be dealt with.
First the problems. During the third quarter Omega sold seven SNFs that were leased to LaVie Care Centers for $84.4 million. In the third quarter, LaVie paid $7.4 million in rent, plus $2.5 million in October. But on November 1, Omega sold an additional 29 facilities for $305.2 million, of which $91.9 million was cash proceeds. According to management, the prices were in the range of $90,000 to $100,000 per bed.
LaVie had been a major tenant of Omega’s, but ran into census and cash flow problems during the pandemic. Who didn’t? Census dropped 1,200 basis points in a year’s time. At one point Omega owned more than 80 LaVie-operated facilities, but that number is shrinking, which will ultimately benefit Omega.
Another problem tenant has been Maplewood Senior Living, which was $1.0 million short of its contractual rent payment to Omega in June, plus $1.0 million short in each month of the third quarter, and again in October. Not to worry, for now, as these shortfalls were covered by a security deposit of $4.8 million, which may be depleted soon. Maplewood is known for its very high-end communities with very high rates in top-tier markets, but it got a bit over its skis in the past several years, and excess leverage and the pandemic did not help, including the delayed opening and cost overruns in its Manhattan community. From Omega’s perspective, at least it is great real estate in great locations.
Another problem tenant is Guardian Healthcare, which did make its contractual rent payments in August and September, so Omega drew down $2.9 million of a $7.3 million security deposit. Another $1.5 million was paid from the security deposit in October. Omega is in discussions to sell or release to another operator the six remaining Guardian facilities.
There was some good news, as the CEO said they are not “taking their foot off the pedal.” Omega acquired 14 care homes (assisted living) in the UK for $39.5 million. They entered into a master lease with a new operator for an initial cash yield of 10.2% with annual escalators of 2.5%. Omega also bought a skilled nursing facility in Virginia for $15.6 million, which was added to the master lease of an existing operator at an initial cash yield of 10% with 2.0% annual escalators.
To start the fourth quarter off, they funded $38.3 million in mortgage loans to a new operator for the acquisition of two assisted living communities in Pennsylvania at a weighted average interest rate of 9.3%. Omega also acquired one facility in Maryland for $22.5 million and added it to a lease with an existing operator at an initial cash yield of 10%, 2% of which can be deferred, and annual escalators of 2.5%.
In other positive developments, on a trailing 12-month basis, occupancy has improved from 75.8% for the 12 months ended June 30, 2022, to 78.6% for the 12 months ended June 30, 2023, a 280-basis point increase. EBITDARM coverage also increased from 1.39x to 1.50x in the same time period.
Omega has cash and cash equivalents of $554.7 million and $1.4 billion of undrawn capacity under its unsecured revolver, so we expect to see them active in the market in the coming year to take advantage of some good values.
After the release of the earnings report, one analyst cut its rating and the shares fell by 6.5%. We suspect they will recover.
