Omega Healthcare Investors - Earnings Call - Q3 2025

Transcript

Speaker 2

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Omega Healthcare Investors Inc. Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. I would now like to turn the conference over to Michele Reber. You may begin.

Speaker 3

Thank you, and good morning. With me today is Omega CEO Taylor Pickett, President Matthew Gourmand, CFO Bob Stephenson, CIO Vikas Gupta, and Megan Krull, 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, potential transactions, operator prospects, and outlook generally. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC. During the call today, we will refer to some non-GAAP financial measures, such as NAREIT FFO, adjusted FFO, FAD, and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under generally accepted accounting principles are available in the quarterly supplement.

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 will now turn the call over to Taylor.

Speaker 10

Thanks, Michele. Good morning, and thank you for joining our Third Quarter 2025 Earnings Conference Call. Today, I will discuss our third-quarter financial results and certain key operating trends. Third-quarter adjusted funds from operations, AFFO of $0.79 per share, and FAD, funds available for distribution of $0.75 per share, reflect strong revenue and EBITDA growth, principally fueled by acquisitions and active portfolio management. Our dividend payout ratio has dropped to 85% for AFFO and 89% for FAD. We again raised and narrowed our 2025 AFFO guidance from a per-share range of $3.04 to $3.07 per share, up to $3.08 to $3.10 per share, which reflects our strong third-quarter 2025 earnings. The $3.09 per share midpoint of our 2025 AFFO guidance range represents 8% year-over-year AFFO growth versus 2024 AFFO of $2.87 per share.

Turning to the portfolio, our occupancy and coverage metrics continue to improve with EBITDA coverage at its highest level in 12 years. Furthermore, as expected, the below-one-times rent coverage bucket has dropped to 4.3% of total rent, with the expectation of further improvement and all but one below-one-times operator paying full contractual rent. I will now turn the call over to Matthew.

Speaker 8

Thanks, Taylor, and thanks to everyone for joining the call today. I'd like to take a few minutes this morning to discuss some of the ways in which we're looking to further enhance shareholder value. At Omega, our primary goal is to allocate capital, primarily to healthcare real estate, with the focus on growing FAD per share on a risk-adjusted basis. Historically, this has almost entirely involved acquiring healthcare real estate and entering into triple-net leases at a yield above our cost of capital. This has been a very successful investment strategy, returning over 1,200% in total shareholder returns over the past 20 years, and it will likely continue to be a significant part of our capital allocation strategy going forward.

However, as the eldercare industry embarks on an expected period of burgeoning growth that is likely to last for the next two decades, we have made a conscious decision to expand our investment structures to align ourselves with operators with the aim of achieving higher returns over time. There are multiple ways in which we can structure such deals, from joint ventures and minority interest investments to back-end participation in value creation upon a sale or recapitalization, as well as RIDEA-like structures. With decades of experience of prudent capital allocation and our platform of sophisticated operators, we believe we are extremely well-positioned to enhance shareholder returns by acquiring underperforming assets at prices meaningfully below replacement cost and partnering with proven operators to significantly enhance the cash flow and hence value of such assets.

We have been making such investments selectively on a small scale for approximately the past 12 months, primarily through investments in the capital stack of real estate that provide an immediate yield in excess of our cost of capital, with an ability to participate in incremental returns upon the sale or recapitalization of the assets. Vikas will give you a recent example of such an investment in a minute. Our targeted returns for such investments are for an unlevered IRR of at least the low to mid-teens, not assuming any cap rate compression upon exit in our underwriting. Another example of such an investment is the 9.9% equity investment in SABR Healthcare Holdings' operating company, announced last night.

SABR has been an operating partner with Omega for over a decade, and during that time, we have grown to understand their corporate culture, with a fundamental focus on strong clinical care that drives sustainable financial performance. While our investment will receive a minimum quarterly cash distribution equivalent to an annual 8% yield, we believe over time this investment will yield an IRR that will meaningfully surpass our low to mid-teens target. We are grateful to the principals of SABR for trusting us to invest in their operating company and look forward to continuing to support the further growth of SABR while adhering to the key resident-focused tenets that we believe are primary drivers of their success. Going forward, we will continue to look at all opportunities and investment structures to potentially align with our operating partners and sustainably grow FAD per share.

This includes RIDEA structures, which we are evaluating in both the U.S. and U.K. We will continue to be highly disciplined in our underwriting, and given the competition for such assets, there's no guarantee that this will become a meaningful part of our business in the next 12 to 24 months. However, we do believe that this approach will provide a high level of conviction as to the value creation opportunity for each investment we make.

More importantly, we believe the business decisions we are making, be it in capital allocation, active portfolio management, or our balance sheet interest rate and currency management, will be made prudently and diligently, using all salient available data, with the primary goal of sustainably growing FAD per share on a risk-adjusted basis. You have seen this in recent quarters as our efforts have started to create traction in our FAD per share growth, and we are hopeful that this will continue over time as our capital allocation decisions bear further fruit. With that, I'll now hand the call over to Vikas.

Speaker 3

Thank you, Matthew, and good morning, everyone. Today, I will discuss the most recent performance trends for Omega's operating portfolio, including an update on Genesis and Omega's investment activity in the third quarter of 2025, including the subsequent closing of the SABR joint venture transaction, an update on Omega's pipeline and market trends for the remainder of 2025. Turning to portfolio performance, our core portfolio consists of 1,024 facilities, of which 60% is comprised of skilled nursing facilities and transitional care facilities in the U.S., and the other 40% is U.S. senior housing and UK care homes. Trailing 12-month operator EBITDA coverage for our core portfolio, as of June 30, 2025, increased to 1.55 times compared to our first quarter 2025 reported coverage of 1.51 times.

Core portfolio coverage continues to trend in an increasingly favorable direction, above industry average coverage levels, and, as discussed in prior quarters, provides us with confidence that our operating partners have sufficient means to continue to provide a superior clinical service to residents, even in a fluid regulatory and reimbursement environment. In addition to the strong credit supporting our existing investments, these coverage levels enable Omega and our operating partners to continue to grow our respective businesses, with the support of the existing free cash flows produced by our current portfolio. As reported on our last call, Genesis filed for Chapter 11 bankruptcy protection in July 2025. As a reminder, Omega leases Genesis's 31 facilities for annual rent payment of $52 million.

Additionally, Omega has a $125 million term loan with Genesis, which is secured by a first lien on the equity of Genesis's four ancillary businesses, which we believe fully secure the loan and have subordinated all assets lien from the overall business of Genesis. Based on our lease coverage and collateral, we believe our credit position in this portfolio is strong. The bankruptcy process is progressing with a few milestones approaching, including the auction of the Genesis assets and the sale approval hearing. We expect this will result in our lease being assumed by Genesis and assigned to the winning bidder. As previously reported, Omega committed to support Genesis by providing $8 million in debtor-in-possession financing as part of a total $30 million debtor-in-possession loan. We have now fully funded our $8 million commitment. Genesis has paid Omega full contractual rent each month since filing bankruptcy.

The bankruptcy process is anticipated to conclude in Q1 or Q2 of 2026. This timeline, along with all elements of the bankruptcy filing process, is subject to the approval of the bankruptcy court. There are no material open issues with any other large operators. Turning to new investments, we are very excited to announce Omega's 2025 transaction activity through the end of October, with over $978 million in total new investments, of which over $850 million, or 87%, were real estate investments added to our balance sheet. During the third quarter, Omega completed a total of $151 million in new investments, not including $24 million in CapEx. The new investments include $67 million in real estate acquisitions via two separate transactions to acquire two facilities, one CCRC and one UK care home, and leased them to two existing operators.

Both transactions have an initial annual cash yield of 10%, with annual escalators ranging from 2% to 2.5%. In addition, Omega invested $84 million in real estate loans via four separate transactions, where the four loans have an interest rate of 10%, as well as an option for Omega to acquire an ownership interest in the underlying real estate upon the refinancing of the loans. Regarding real estate loans, we would like to highlight that while we place a focus on allocating capital to own real estate investments that grow our balance sheet, we have and continue to see the opportunity to make strategic loan investments that provide Omega the ability to capture a portion of the upside in the underlying real estate.

By way of example, in 2024, Omega made a loan investment for an assisted living facility in Connecticut, which provided for Omega to realize 50% of the value creation above the original cost basis. Since that time, our operating partner was able to dramatically improve performance and refinance Omega's loan in October 2025 for triple the original basis, providing Omega with a material return in excess of our loan repayment, resulting in an IRR of 74%. This transaction is an example of how certain loan structures can provide for outsized returns in the absence of permanent real estate ownership. Turning to subsequent events, subsequent to quarter-end in October, Omega invested $222 million to acquire a 49% equity interest in a portfolio of 64 healthcare facilities under a real estate joint venture, which is majority owned by affiliates of SABR Healthcare.

All 64 facilities are leased to SABR under long-term triple-net leases, with 2% annual fixed escalators and underlying portfolio rent coverage of over 1.46 times. Omega anticipates receiving an initial annual return on its investment of 9.3%, escalating thereafter. The investment represents a total portfolio value of approximately $900 million for the real estate, which is encumbered with $449 million of mortgage debt. This is a loan to value below 50%, which provides the joint venture with ample equity value to utilize for future acquisitions. SABR is a longstanding operating partner of Omega, where, in addition to the 64 joint venture facilities, SABR operates 51 additional facilities owned by us and leased under a consolidated triple-net master lease. The entirety of the $222 million consideration was paid via the issuance of Omega operating partnership units.

The ability to utilize Omega OP units as currency for a new investment is another powerful tool Omega has at its disposal to provide sellers with a tax-efficient vehicle and to also create alignment with us, as the value of those OP units is tied to the continued performance of our share price. As Matthew mentioned, in conjunction with the closing of the SABR real estate joint venture, Omega and SABR entered into a definitive agreement for us to invest $93 million to acquire a 9.9% equity ownership interest in SABR Healthcare Holdings, SABR's parent operating company, which operates 139 facilities, 126 skilled nursing facilities, and 13 assisted living facilities.

The closing of our ownership interest in SABR's parent operating company is expected to occur in January 2026 and will represent a unique structure in the skilled nursing industry, creating a strong alignment between Omega as a major capital partner and SABR as a best-in-class operating partner. Growth as a team, where real estate and operational success benefits both partners. It is our expectation that the Omega-SABR relationship will continue to grow meaningfully in the years ahead, with the added benefit of having the ability to transact under various deal structures: our own triple-net portfolio, the SABR Omega real estate joint venture, and the SABR operating company. We are very excited about this new partnership and look forward to sharing that growth story in the years ahead. Turning to the pipeline, our pipeline and transaction outlook for the remainder of 2025 and into 2026 continues to be very favorable.

Market opportunities both in the U.S. and the UK continue to be substantial, and we are witnessing an increase in our ability to secure off-market opportunities that our operating partners and other relationships bring us. We are seeing individual and regional clusters of senior housing assets, many of which are underperforming or non-stabilized, that can be acquired at prices meaningfully below replacement cost and the ultimate stabilized value. Transaction activity for skilled nursing opportunities in the U.S. and care homes in the UK also continues to be robust, and we are evaluating numerous opportunities from individual owner-operators and regional sellers, most of which Omega has sourced from existing relationships.

We continue to evaluate and consider all asset types with increased flexibility on deal structure to ensure that Omega and its shareholders are able to benefit from improvements to the underlying cash flows of our facilities, whether that be through variations on triple-net lease structures, RIDEA for senior housing assets, or strategic joint ventures, as exemplified by our new partnership with SABR. I will now turn the call over to Bob.

Speaker 10

Thanks, Pickett, and good morning. Turning to our financials for the third quarter of 2025. Revenue for the third quarter was $312 million, compared to $276 million for the third quarter of 2024. The year-over-year increase is primarily the result of the timing and impact of revenue from net new investments completed throughout 2024 and 2025. Our net income for the third quarter was $185 million, or $0.59 per common share, compared to $112 million, or $0.42 per common share for the third quarter of 2024. Our NAREIT FFO for the third quarter was $242 million, or $0.78 per share, as compared to $196 million, or $0.71 per share for the third quarter of 2024.

Our adjusted FFO was $243 million, or $0.79 per share for the quarter, and our FAD was $231 million, or $0.75 per share, and both exclude several items outlined in our NAREIT FFO, adjusted FFO, and FAD reconciliations to net income found in our earnings release, as well as our third quarter financial supplemental posted to our website. Our third quarter FAD was $0.14 greater than our second quarter FAD, with the increase primarily resulting from incremental revenue related to the timing and completion of $678 million in new investments completed during the second and third quarters. Incremental Maplewood revenue, as they paid $18.7 million in rent in the third quarter, an increase of $1.1 million compared to the second quarter.

These were partially offset by $81 million of asset sales, representing $1.2 million of revenue recorded in the third quarter and the issuance of 9 million common shares of stock over the past two quarters. Our balance sheet remains incredibly strong, and we've continued to take steps to improve our liquidity, capital stack, and maturity ladder. We entered into a new $2.3 billion credit facility, consisting of a $2 billion senior unsecured revolver and a $300 million delayed draw term loan. We intend to draw on the term loan on or about November 25 and use the proceeds to repay the $246 million secured mortgage loan we assumed in the acquisition of the CINDET JV last summer. Additionally, we both extended the maturity date of the existing $428.5 million term loan one year to August 2026, amended the term loan to improve the pricing grid by 35 basis points.

At September 30, we ended the quarter with $737 million in cash on the balance sheet. On October 15, we repaid $600 million of the 5.25% senior unsecured notes at par. Our fixed charge coverage ratio was 5.1 times, and our leverage reduced to 3.59 times. Given our strong equity currency, we have the flexibility to accretively fund investments with equity, as we have for the past several quarters, including funding the SABR Propco JV using Omega operating partnership units. In addition, next week, we plan to put in place a new $2 billion ATM program. We are excited as our balance sheet and cost of capital have positioned us for significant adjusted FFO growth as we opportunistically look to the capital markets to fund our active pipeline.

Turning to guidance, as Taylor mentioned, we raised and narrowed our full-year adjusted FFO guidance to a range between $3.08 to $3.10 per share. This is a $0.035 increase over the midpoint of our August guidance. The increase was due primarily to the completion of $374 million of new investments that closed post our second quarter earnings call. The key assumptions in our revised full-year guidance are on the revenue and expense side, we're assuming no other changes in our revenue related to operators on an accrual basis of revenue recognition. Genesis continues to pay full rent and interest payments pursuant to the terms of the DIP financing agreement. Maplewood continues to pay $6.3 million per month, which is consistent with their October payment. Derivative instruments reduce the impact of foreign currency fluctuations on income generated by our UK investments for the fourth quarter.

We project our fourth quarter G&A expense runs between $13.5 million to $14.5 million. On the investment side, we've included the impact of the new investments completed as of October 30 and did not include any additional new investments. On the balance sheet, of the $209 million in mortgages and other real estate-backed investments contractually maturing in 2025, we're assuming $56 million will convert from loans to fee simple real estate, with the balance of the loans being extended. We repay our $246 million of secured debt on or about November 25 using proceeds from the $300 million delayed draw term loan.

Although we didn't end the quarter with any facilities classified as assets held for sale, we are always pruning and strengthening our portfolio, which has historically led to between $10 million to $20 million in asset sales in any given quarter, and we assume no material changes in market interest rates. Our 2025 adjusted FFO guidance does not include any additional investments or asset sales, as well as any additional capital market transactions other than what I just mentioned or that was included in the earnings release. I will now turn the call over to Megan.

Speaker 2

Thanks, Bob, and good morning, everyone. While there is no telling when the federal government shutdown will end, it thankfully has largely no impact on funding mechanisms to the long-term care industry. That said, given the current state of affairs, the automatic 4% cut in Medicare to occur in early 2026 as the result of the deficit caused by the OBBVA has not yet had a chance to be dealt with legislatively. As I noted last quarter, historically, legislative action has been taken to avoid this type of reduction. However, even without legislative action, netted with a 3.2% increase in Medicare effective October 1, the overall impact to our portfolio would be minimal.

We continue to be grateful for the carve-out of skilled nursing from the Medicaid reductions in the OBBVA, but we are also carefully watching the landscape as the hospital systems deal with the reductions coming their way, as this could cause states to reassess their allocation of funds amongst the various provider groups. The state associations and our operators work closely on the local front to ensure an understanding of the necessity of long-term care, and that, coupled with our strong fundamentals and demographic tailwinds, continues to make us feel well-positioned in light of that potential headwind.

While the staffing mandate was all but dead given the loss in two federal courts surrounding its key provisions and the 10-year moratorium imposed on its implementation by the OBBVA, HHS has now also withdrawn its appeals in court, and as a final nail in the coffin, CMS has drafted an interim final rule under review by the Office of Management and Budget labeled "Repeal of Minimum Staffing Standards for Long-Term Care Facilities." We applaud the continued efforts by industry associations, partners, and operators to educate the legislative and executive branches on the importance of the long-term care industry, as well as the continued support by the administration. We also look forward to the potential for regulatory changes signaled by the request for information in the skilled nursing proposed payment rule earlier this year on ways to streamline regulations and reduce administrative burdens.

I will now open the call up for questions.

Speaker 8

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press Star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press Star 1 again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. We do request for today's session that you please limit to one question and one follow-up question only. Thank you. Our first question comes from the line of Jonathan Hughes with Raymond James. Your line is open.

Hi there. Happy Halloween. Thanks for the prepared remarks and commentary. I was hoping you could share some more details on your pursuit of higher growth shop or RIDEA opportunities, maybe investment volume we could expect in the next 12 to 24 months. I think you mentioned low double-digit IRRs, but maybe what about initial yields that you're looking for?

Speaker 7

Sure. Thanks, Jonathan, and happy Halloween to you too. I think in terms of investment volumes on a quarterly basis or on an annual basis, it's just really going to depend on what opportunities present themselves. I think as we look at it, we think back to the way we entered the UK market a decade ago. Initially, we dipped our toe in a little bit and really took some time to understand the industry, the operators within that industry. I think we have a much, much better understanding of a lot of that today within the U.S. senior housing side of things. You saw us effectively aggressively grow that portfolio to $2 billion of assets when the opportunities presented themselves over the last 24 months. I think it's really just going to come down to that.

We're looking extensively at all different options, both in terms of structures and in terms of assets. In terms of your second question, going-in yields, we clearly like to have a decent positive yield out of the gate, but again, I think it's just going to really depend on the long-term opportunity for value creation there. Understanding that sometimes the best opportunities don't necessarily have a very good return today. I think there are ways in which we can structure that, where we can have some level of accretion and participation if we don't want to take on the entirety of the risk. At the same time, with RIDEA, we're willing to take on a lower yield going in if it ultimately means a meaningfully higher yield than we're able to achieve in our triple-net leases over the longer term.

I think we're relatively agnostic in just looking at each deal on a deal-by-deal basis as to the long-term value creation for shareholders.

All right. That's great, Carl. I appreciate it. I've got just one more for maybe for Taylor. I think at the start, you mentioned dividend coverage is now below 90% of FAD, and you were able to successfully maintain that dividend through the pandemic. Can you just talk about the potential for future dividend growth and how the board views that dividend versus retaining funds for external growth?

Yeah, and you're exactly right. It's a board decision, Jonathan. From our perspective, we start to bump up against tax limitations in the low 80%. We're moving rapidly through the 80% towards the 70%. I think every quarter we'll look at that. There's a pathway in the near term to get to a dividend increase. I would just say, if you look back, not only did we not cut dividends during COVID, if you look back to the period of growth a number of years ago, we were able to increase the dividend every quarter for five straight years. I think we have the setup in terms of our balance sheet and the team deploying capital in a way where returning to that type of growth is certainly a possibility. That's what we're aiming to do.

All right, thanks again for the time.

Speaker 8

Our next question comes from the line of John Kielichowski with Wells Fargo. Your line is open.

Good morning. Thank you. Maybe if we could start with the SABR portfolio. I think you, in the opening remarks, made a comment that it was 1.46 times covered. I'm curious how that's trended recently, and then also the underlying occupancy of the portfolio and just sort of what you're forecasting for the next 12 months.

Speaker 7

Yeah. This is Vikas. The coverage is trending above the 1.46. SABR continues to do very, very well, and the occupancy is in the low 90%. Overall, SABR is just outperforming budget and just doing a great job overall.

Okay. That's helpful. Thank you. Maybe just looking at the quarter holistically, you did a CCRC deal. You did an OPCO-PROPCO deal with SABR. I'm just curious what the opportunity set looks like here going forward. Maybe it feels like a little bit of a diversion from maybe your typical triple-net SNFs in your housing, some care homes. There's only one care home in the quarter. What does this mean for the go-forward pipeline? Are we likely to resume maybe to more of that, or do you think that there's a lot more opportunities out here with operators like a SABR that you have a lot of respect for how they operate and also are willing to participate in a structure like this?

Yeah, a couple of comments around that. I think—we've expanded the toolkit pretty broadly because we just have a deeper bench. We have a better team. We can look at a lot more types of transactions, particularly where the yields are higher than our traditional triple-net with escalators. That being said, we're still finding plenty to do on the triple-net side here and in the UK. SABR in particular, that's pretty unique. People should think of SABR, they're essentially the private Edsun, and they're set up to grow really significantly in a very accretive way over the next five-plus years. We're really excited to be part of that because I think the upside there in our investment, plus the yield we're getting on that investment, is really remarkable, and we'll see how that plays out. That being said, are there a lot of SABRs out there? No.

We're happy to partner with that, and we're excited at this point in their growth progression. I think that transaction for us is likely unique to the SNF industry.

Got it. Very helpful. Thank you. Congrats on the quarter.

Thank you.

Speaker 8

Next question comes from the line of Seth Bergey with Citi. Your line is open.

Hi. Thanks for taking my question. Just a little bit more on SABR. Can you kind of talk about what the geographic focus is of the assets that are in the JV? Obviously, this transaction allowed SABR to kind of monetize some of their real estate, kind of, and you've talked about the growth opportunity with them. Can you kind of touch on maybe their motivation for monetizing the real estate and how they're thinking about deploying that capital?

Speaker 7

Yeah. This is Vikas. I'll take the first part. These are 64 facilities, 58 are skilled nursing facilities, and 6 are assisted living facilities. They're located in six states: Delaware, Indiana, North Carolina, Ohio, Pennsylvania, and Virginia. I'll turn it over to Taylor for this one. In terms of motivation, the executives that own and run SABR are relatively young, and they've created a lot of value and wealth. I think from their perspective, it was a good time to take something off the table. More importantly, to partner with a capital partner who can drive meaningful growth from here. They retained, obviously, 51% of their real estate. They retained 90% of their operating company. That operating company generates substantial cash flow. They're setting themselves up for future growth, and we're lucky enough to be partnering with them.

Thanks. Just one more, as you expand the toolkit of opportunities doing this type of structure, how are you weighing shop versus field and the U.S. versus other markets? As you think about all that, how do you see the '26 pipeline shaping up as it compares to the level of transaction activity you've done year to date in '25?

We don't normally give guidance in terms of what we expect the pipeline to look like, but if you look at the opportunities presenting themselves today, we've done nearly $1 billion of deals year to date. It feels like we're in that kind of cadence where we could allocate a similar amount of capital. In terms of the opportunities that present themselves, it's really just going to come down to the risk-adjusted returns on everything. A couple of years ago, the vast majority of what we did was in the UK because that's where the opportunity presented itself. My suspicion is that next year is going to look like a good year for U.S. SNF, UK care homes, and I think we'll also be able to augment that with a decent amount of U.S. senior housing on top of that, predominantly in a non-triple-net format.

I think the pipeline looks good on all of them, but it's really just going to be determined by what opportunities present themselves and provide a risk-adjusted return that looks compelling to us.

Great. Thanks.

Speaker 8

Next question comes from the line of Juan Sanabria with BMO Capital Markets. Your line is open.

Hi. Good morning. Thanks for the time. Just hoping that we could talk a little bit more about SABR. I guess one of the questions we've gotten, which I think is fair, is just the investment in the OPCO, the going-in yield is lower than what you are getting on traditional triple-net low-risk real estate investment. If you could just talk about the strategy of why accepting a lower yield for that theoretically riskier OPCO investment.

Speaker 7

Yeah, Juan. I would tell you that our 9.9% of the projected 2026 cash flow is far more than 8%. We're happy to have the operating company retain significant cash to build on their growth. From our perspective, risk-adjusted returns likely very high teens. This is a business where, from my perspective, I look at their equity value today, and I think about the Ensign trajectory and a very similar platform, just smaller. I look at our equity investment. I'd be very disappointed if we don't double or triple that investment over time.

On the investment, if you could help us frame how you thought about valuing the OPCO and if there's any EBITDA being generated outside of your prior existing lease and this kind of new lease joint venture you set up.

As I mentioned earlier, my response to your last question, the cash flow generated by the OPCO is very substantial. Our 9.9% share of that cash flow is far more than the 8% yield that they're paying on our investment. They're a private company, so beyond that, I can't disclose much more other than to say that stands on its own. It's got lots of cash flow. There's lots of opportunities. We think there's going to be great growth there.

Speaker 8

Next question comes from the line of Omotayo Okusanya with Deutsche Bank. Your line is open.

Hi. Yes. Good morning, everyone. Just wanted to push a little bit more along Juan's line of questioning. In terms of the SABR OPCO, can you just kind of give us a general sense of, again, what kind of growth profile did you guys kind of underwrite for that entity? Is it kind of similar to some of the stuff we've seen on the shop side on senior housing where these things are growing 15% to 20% since the renewal? We're just trying to get a better sense of kind of what the growth profile of that entity could be over the next few years.

Speaker 7

Yeah. Again, similar to Ensign, you can look at publicly how they've grown. It's not same store inside the box growth. It's the platform, finding opportunities, additional facilities that tend to be underperforming where you can be additive. There are huge opportunities there. It really just comes down to how fast do they grow. I would point you to the public peer that I think is the best comp in that sense, and you can look at their growth quarter over quarter. It's really meaningful. You don't have to rely on pushing rates. You don't have to rely on cutting expenses. It's really just taking underperforming assets in this industry and turning them around. We've seen SABR do that for the last decade.

Gotcha. On the proper side, any opportunities to refinance the 6.1% debt to kind of a lower rate?

Yes, absolutely. The majority of the debt is HUD debt today, which is long-term, good rates. The plan is to further refinance the non-HUD debt into HUD debt and then continue to just keep looking at the debt profile to lower rates as that becomes available.

Gotcha. Thank you.

Speaker 8

Next question comes from the line of John Poloski with Green Street. Your line is open.

Good morning. Thanks for the time. I just have two questions on the labor backdrop. First, maybe a compare and contrast: the U.S. versus the UK. When you talk to your operators, what type of wage increases are folks budgeting for next year in the U.S. versus UK?

I mean, I think the wage increases are still pretty much matching inflation at this point in time. I don't know if that's different between the U.S. and UK. The UK doesn't quite have the same staffing issues that we have here in the U.S., although those have eased a bit. The expectation is, as demographics increase, there's going to be always an issue there.

Okay. Final question, maybe to follow on there. In the U.S., Megan, are you seeing, I guess, where are you seeing any pockets of labor availability issues resurface in certain states? Are you seeing certain operators have to pull the temp agency, temp labor lever a little bit more?

We really haven't seen agency increase anywhere. It came down after COVID and has pretty much stayed down. Obviously, you're going to see it in a building here or there, right? People can't get 100% out of agency. That's a really tough thing to do. The rural areas tend to be the toughest. I think what people are doing is, rather than bring agency on, they just don't take the additional resident on until they have staff in there. It's a big culture push for all of our operators to really change the way that they hire people and make sure that they retain them.

Okay. You haven't seen any in recent months or quarters, you haven't seen any glimpses of issues stemming from just slower migration?

No, we haven't.

Okay, thanks for the time.

Next question comes from the line of Pharrell Granath with Bank of America. Your line is open.

Hi. Good morning. This is Pharrell Granath. I wanted to go back to SABR. I know that you had just outlined the deal had a mix of SNFs and AL. I was curious on SABR's acquisition front, or at least their strategy going forward, are they aligned with you of also expanding into senior housing itself, or do they want to maintain more of a skilled mix?

Speaker 7

Yeah. Just to repeat my numbers, there's 50 SNFs in this portfolio and 6 houses. They're in 6 states. The plan is to keep growing the SNF portfolio in those states and other states. We are very much aligned with them with that plan.

Talk about the—that's within the JV. Then overall.

Oh, yeah. I mean, overall, the portfolio consists of 126 SNFs and 13 houses. Once again, SABR is a very SNF-focused operator, as Taylor and Matthew mentioned. We think of them as best in class. The idea here is to keep growing the SNF portfolio. If an occasional house is picked up in that, that's okay. SABR can handle it, but they are a very SNF-focused operator.

Thank you. When it comes to your coverage levels, you made a comment that you've reached almost new highs currently. Where are you seeing that trend going forward? Do you think we're reaching a point of leveling out when it comes to coverage?

I will tell you the trend is still up. I think to the extent that occupancy continues to grow, that will be the trend. We know from demographics. We've seen it. We can model it. We know that occupancy is going to continue going up. We may, for the first time in a while, begin to see some seasonality in occupancy. We haven't seen that for a while coming out of COVID with the COVID lows in terms of occupancy. The occupancy will keep driving coverage. I think 155 is not a baseline that will keep growing.

Speaker 8

Okay. Thank you. Next question comes from the line of Wes Golode with Baird. Your line is open.

Good morning, everyone. I want to go back to the opportunity where you said you could do some loans with back-end recaps. Are you seeing a lot of competition for these types of deals? Does your position as an existing landlord give you a little bit of an advantage there?

Speaker 7

Yeah. I mean, this product started when the debt markets were extremely tight in the U.S., and we've partnered with many sponsors and operators to create a $300 million portfolio. As I said in the one example, we created a lot of IRR with that one transaction. We see a lot more of this coming potentially with our portfolio. We're not seeing a ton of competition in this space because what we've proven to our operating partners is that we're there for them for these turnaround opportunities, and they've proven to us they can turn them around. We continue to keep growing that segment of our business meaningfully, but only if we believe in the upside.

Okay. Thank you.

Speaker 8

Next question comes from the line of Michael Carroll with RBC Capital Markets. Your line is open.

Thanks. How should we think about the opportunity set to do more of these OPCO-type deals? Do you have any more in your pipeline? I guess what's the outlook on that front?

Speaker 7

I'd say that opportunity set is very narrow. In terms of the type of transaction when we did with SABR, they're a uniquely fantastic operator. That being said, it wouldn't be out of the question to see this again, but there is absolutely nothing in our pipeline today to repeat this transaction.

Okay. When you underwrite these types of transactions, should we think about the potential focus more on your existing tenant roster where you have, I guess, close knowledge of their business model, or could you go outside of the tenant roster if you can get comfortable with that?

Yeah. I mean, obviously, the more knowledge you have of an operator and experience you have of an operator, both from a financial standpoint, but more importantly from a clinical standpoint and understanding the sustainability of that business model, the more comfortable you are going to be taking that alignment of interest by taking an operating exposure. That aligns more likely with our current operator portfolio. As Taylor said, there's nothing imminently on the horizon, even within that portfolio today, that would suggest this is going to be something we're going to be executing on in the next 6 to 12 months.

Okay. Great. I appreciate it.

Speaker 8

Next question comes from the line of Richard Anderson with Cantor Fitzgerald. Your line is open.

Thanks. I'd like to ask a much larger picture question. You talked about sequestration risk being pushed into 2026 if the government ever gets its act together. On the Medicaid side, obviously, SNFs were spared. What is your comment about Medicaid cuts and state budgets and just an indirect concern about how states may be able to operate in the future with the Medicaid cuts, even though your specific business wasn't targeted? Are you concerned at all about just state profitability or something? I'm just curious where you stand on that.

It is definitely something that we're keeping an eye on and monitoring. There have been a few states who have started to bring up OB/BPI issues. I will say that in most of those states, there's very strong support for skilled nursing and not cutting skilled nursing rates, which has been a positive. We've seen some of those cuts come through, but we've seen that people are very supportive of maybe pulling back some of those cuts that have already occurred, like in Idaho and North Carolina. The reality is, when we look at our top 10 states, I think we're pretty well positioned. We've got Texas and Florida, which aren't expansion states. They won't be touched at all.

All of the other states really fall into we haven't heard any concerns, or they have higher coverages than our average coverage, so any cut would probably still keep them above that average coverage. That's the case in North Carolina and Idaho right now, or they are very much so in multiple states, so they're a little bit insulated from any one given state having an issue. Couple that all with the fact that our coverages are where they are, we feel pretty well insulated that we can weather that going forward.

Okay. Great. Second question. I'm not going to ask about SABR. It's been beaten to death. On Maplewood, I think it was $18.7 million of rent. That's $74 million, $75 million annualized. Is there an idea that you can ever get to the full $89 million in any kind of reasonable period of time? Or is it starting to feel like it's approaching that? Because a couple of years ago, I didn't think it was ever in the radar. Is it getting in the radar in your mind?

Speaker 7

We have a lot of faith in that management team. They have been able to already demonstrate meaningful growth, right? You've seen it over the last couple of years where that number's moved up into where it sits today. You look at that trajectory, they have very high occupancy, which obviously limits their opportunity to push occupancy, but it increases their opportunity to push rates. These are highly, highly desirable properties in very wealthy, affluent communities. I think that as they're able to push that rate with the 30+% margins they have, you see an opportunity for meaningful cash flow improvement continuing in that portfolio. I don't want to put a timeframe on it, but absolutely, I think there is a visibility into that number at some point in the not-too-distant future.

What would you say about Second Avenue progress lately?

The occupancy there is 96%. Things are—the building is basically full. As residents move out and more residents move in, to Matthew's point, they can push rate. We expect further cash flow growth there.

Awesome. Okay. Thanks, everyone.

Speaker 8

Next question comes from the line of Vikram Malhotra with Mizuho. Your line is open.

Morning. Thanks for the questions. I guess just first want to clarify, you had mentioned that there was a loan that got repaid in October with an upside kicker that got you to high return. Just maybe give us a bit more detail. How big was the loan? What was the gain above the interest rate?

Speaker 7

Yeah. It's a smaller deal, but I'll detail it a little bit. It was a $6 million transaction, Omega funded the majority of the money, and then the operator was able to improve performance and refinance the building for $18 million. Omega was able to put $6 million in our pocket. Once again, this was—sorry. On top of that, we maintain a contractual agreement that if the building is refinanced again or sold, we also share 50% of the upside. Again, it's a small example with a meaningful IRR. It's not saying we will achieve that in all deals, but we wanted to show an example of the potential of the upside in these types of transactions.

Okay. Just to be clear, the gain, what you said, was $6 million?

Correct. Yes, on that one transaction.

On that one. Okay. Just going back to the broader opportunity set, I know you said there are very limited SABR-type deals. Just two clarifications. You referenced Ensign. Should we assume the SABR margins, EBITDA, operating net income margins are like Ensign, number one? Number two, can you clarify the comment about senior housing RIDEA in the U.S.? In the past, I think you've said you'd prefer more triple-net-like deals where you can get higher yields over time. I just want to understand what types of RIDEA senior housing U.S. would you be looking at, and what's the pipeline look like? Thanks.

Sure. SABR margins are very strong. Enzyme-like margins. On the RIDEA front, I will tell you we have a U.S. deal and a UK deal in the pipeline today, and we're working on documents. Does it mean they'll close? I don't know. We're prepared to do your traditional RIDEA. We spent a lot of time making sure we had the tools here to handle that, and we do. Will those deals close? I don't know. We'll keep looking at those and others.

Speaker 8

Next question comes from the line of Amataia Okosanya with Deutsche Bank. Your line is open.

Yes. I wanted to go back to some of Megan's commentary just around CMS initiatives looking for input into how to streamline regulation within the skilled nursing industry. Just kind of curious what suggestions Omega may be making, what suggestions the industry as a whole may be making, and how does that end up whether improving the bottom line of skilled nursing facilities, improving operational processes, and kind of whatever it may make, whatever the potential impact would be if these recommendations are taken up by CMS?

Yeah. I mean, look, all the various industry associations are really pushing this pretty hard. The idea is sort of around how do you make the survey process a little bit more rational and reasonable. Where if you go in and you see an operator that they've had something that you could call for a tag, if they've already corrected it and they've done all the work to make sure they're in compliance and that it can't happen going forward, maybe don't have a system where you call that tag and you have financial repercussions when they're clearly showing that they're doing the right thing. More rationalization around the survey process, more rationalization around the rating process as well. Some of the maybe redundant reporting that's going on. I mean, all of these things, especially on the survey side, would have a major impact.

I think they're looking at ways that they can just take that system, look at other systems, see if they can just, again, make it more rational in general. I think that will all fall to the bottom line if they can fix some of those things because we really find that the survey process can really penalize unnecessarily good operators. That's what we're looking forward to.

Thank you.

If you would like to ask a question, press star, then the number one on your telephone keypad. There are no further questions at this time. I would like to turn the call back over to Mr. Taylor Pickett for closing remarks.

Speaker 7

Thanks, everyone, for joining the call today. As always, the team's available for follow-up. Have a great day. Have a happy Halloween.

Speaker 8

Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.