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OMEGA HEALTHCARE INVESTORS INC (OHI)·Q1 2019 Earnings Summary

Executive Summary

  • Q1 2019 delivered stable top-line and improved sequential AFFO: operating revenue was $223.7M (+1.6% YoY), AFFO was $161.3M ($0.76/share), up from $0.73 in Q4 2018, driven by portfolio stabilization post-Orianna and incremental revenues from 2018 investments; payout ratio was 87% of AFFO and 97% of FAD .
  • Guidance was affirmed: FY 2019 Adjusted FFO $3.00–$3.12, and Q4 2019 $0.78–$0.81; management flagged potential ATM equity issuance and MedEquities close as variables impacting the full-year range .
  • Texas exposure remains the principal headwind (Daybreak rent deferrals of $2.5M in Q1 and Q2), with anticipated relief from PDPM and a 2.5% Medicare rate increase starting October 1; occupancy trends stable at 82.8% in Q4 TTM .
  • Strategic catalysts: MedEquities merger closing mid-May (~$600M EV), redeployment of Orianna proceeds at 9–9.5% yields, and Manhattan senior housing project opening early 2020; pipeline “picking up” with SNF cap rates around ~9% .
  • Consensus estimates from S&P Global were unavailable at time of analysis (tool limit exceeded); comparisons vs estimates not shown. Values would typically be sourced from S&P Global.

What Went Well and What Went Wrong

What Went Well

  • “We had a solid first quarter…MedEquities closing imminent…Orianna assets resolved…G&A began to moderate,” signaling operational normalization post-2018 repositioning .
  • Sequential improvement: Adjusted FFO rose to $0.76/share versus $0.73 in Q4 2018, with dividend maintained at $0.66/share; payout ratios expected to strengthen through 2019 .
  • Portfolio and pipeline momentum: ~$42M invested in renovation/CIP; ATM/DRIP issuance of ~3.1M shares ($110.6M) bolstered balance sheet flexibility; pipeline “beginning to pick up,” with SNF cap rates tightening slightly as rates fell .

What Went Wrong

  • Texas SNF headwinds: Daybreak liquidity pressures necessitated $2.5M rent deferrals in Q1 and Q2; management remains cautious pending PDPM rollout and potential Texas rate relief (QIPP/NFRA) .
  • GAAP net income declined YoY to $72.2M ($0.34/share) from $87.9M ($0.42/share), primarily due to lower gains on asset sales, MedEquities acquisition costs, and higher impairments on leases/real estate .
  • Elevated legal/G&A costs lingered near-term (Q1 G&A $11.8M including ~$1.0M restructuring), with normalization to $9–$10M/quarter expected in H2 2019 .

Financial Results

MetricQ1 2018Q3 2018Q4 2018Q1 2019
Operating Revenues ($USD Millions)$220.2 $221.9 $219.8 $223.7
Net Income ($USD Millions)$87.9 $59.1 $64.9 $72.2
Diluted EPS ($USD)$0.42 $0.28 $0.31 $0.34
FFO ($USD Millions)$147.4 $159.4 $124.5 $144.1
FFO per share ($USD)$0.71 $0.76 $0.59 $0.67
AFFO ($USD Millions)$161.3 $162.6 $155.3 $161.3
AFFO per share ($USD)$0.78 $0.77 $0.73 $0.76
FAD ($USD Millions)$143.8 $144.0 $138.2 $145.2
Dividend per Share ($USD)$0.66 $0.66 $0.66 $0.66

Segment revenue composition (Q1 2019):

SegmentAmount ($USD Millions)Mix (%)
Skilled Nursing/Transitional Care$179.4 80%
Senior Housing$27.2 12%
Real Estate Tax & Ground Lease Income$4.0 2%
Other (Investment/Misc.)$13.1 6%
Total$223.7 100%

Revenue by investment type (Q1 2019):

Investment TypeAmount ($USD Millions)Mix (%)
Rental Property$188.2 84%
Real Estate Tax & Ground Lease Income$4.0 2%
Direct Financing Leases$0.3 0%
Mortgage Notes$18.1 8%
Other Investment & Misc.$13.1 6%
Total$223.7 100%

Key operating expenses (Q1 2019, selected):

  • Depreciation & Amortization: $70.9M; G&A: $11.8M; Impairments (direct financing leases): $7.7M; Stock-based compensation: $4.1M; Merger costs: $2.9M; Interest expense: $48.1M .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Adjusted FFO per shareFY 2019$3.00–$3.12 (Feb 11, 2019) $3.00–$3.12 (May 7, 2019) Maintained
Adjusted FFO per share (Pro Forma)Q4 2019$0.78–$0.81 (Feb 11, 2019) $0.78–$0.81 (May 7, 2019) Maintained
Non-cash revenue (modeling)Quarterly 2019$16–$18M per quarter (Q4 call) Reiterated in Q1 call Maintained
G&A run-rateH2 2019$9–$10M/quarter target (Q4 call) $9–$10M/quarter in H2 2019 (Q1 call) Maintained
Dividend per shareQuarterly$0.66 (declared Oct/Jan) $0.66 (declared Apr, paid May 15) Maintained

Management noted potential use of ATM equity, which “may significantly impact” guidance ranges depending on market conditions .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 & Q4 2018)Current Period (Q1 2019)Trend
Daybreak/Texas liquidity & rentQ4: Deferrals granted; Texas Medicaid and labor pressures; plan for $5.2M rent in Q1/Q2 on cash basis Q1: $2.5M rent deferrals in Q1/Q2; QIPP expansion (26 facilities), PDPM + 2.5% Medicare increase expected to help; monitoring Q-mix and legislative NFRA Challenged near-term, improving into Q4/Q1 2020
PDPM and Medicare rate increaseAnticipated positive margin impacts and clarity for underwriting PDPM budget-neutral revenue; margin uplift via therapy efficiency; 2.5% PPS rate bump; operators preparing; limited transition risk Positive setup for H2 2019/2020
MedEquities acquisitionFiled S-4; expected close in Q2; diversifies assets/operators Closing mid-May; ~7.5M OHI shares issued, ~$350M debt assumed; diversified asset classes beyond SNF Near-term catalyst/completion
Pipeline & cap ratesQ4: pipeline more active, yields in the 9s Q1: pipeline picking up; SNF cap rates ~9, slightly tighter as rates fell; targeting ~$1B activity with MRT ~$600M Improving activity
G&A normalizationElevated due to legal/workouts; normalization planned H2 2019 Q1 G&A $11.8M (incl. $1.0M restructuring); normalizing to $9–$10M per quarter in H2 Normalizing
Occupancy & coverageTTM coverage 1.67x/1.32x; core rent share rising Occupancy stable at 82.8% (Q4); wide range of PDPM margin uplift (0.02–0.11 coverage) by operator Stable to modestly improving
Leverage & fundingNet funded debt/EBITDA ~5.5x; potential ATM ~5.2x net funded debt/annualized EBITDA; may issue equity under ATM to de-lever De-levering focus
Manhattan senior housing (Inspir)Late 2019 opening; rent estimates updated Opening early 2020; pre-leasing strong; rent estimates tracking underwriting; budget ~$285M On track

Management Commentary

  • CEO: “We had a solid first quarter…MedEquities closing imminent…resolved Orianna…provided Daybreak near-term liquidity relief…PDPM and the 2.5% increase in Medicare reimbursement…will augment the improving census” .
  • CEO: “Adjusted FFO of $0.76/share is $0.03 more than Q4 2018…payout ratio is 87% of adjusted FFO and 97% of FAD…guidance remains unchanged…we’ll revisit after MRT close and Q2 results” .
  • CFO: “Operating revenue was ~$224M vs ~$220M in Q1 2018…includes ~$15.8M non-cash; G&A $11.8M including ~$1M restructuring; interest expense ~$48M; $7.7M impairment on direct financing leases (Orianna)” .
  • COO: “Daybreak struggles reflect Texas reimbursement pressures…we granted $2.5M rent deferral in Q1/Q2; expect benefits from QIPP, PDPM, and 2.5% rate increase effective Oct 1” .
  • SVP Ops: “CMS proposed SNF payment rule: net +2.5% PPS rates; PDPM confirmed; group therapy definition revised; operators have begun training; we do not expect significant transitional problems” .
  • CDO: “Inspir at Carnegie Hill expected to cost ~$285M and open in early 2020…Senior housing portfolio totals $1.5B investments; continued investment ($47.6M in Q1) in construction and reinvestment” .

Q&A Highlights

  • Pipeline and cap rates: Management sees an active pipeline with SNF cap rates ~9%, slightly tighter with lower rates; a “good year” near ~$1B of deal activity including MRT .
  • PDPM risk: Revenue neutrality expected; upside from margin improvements via therapy efficiency; extensive collaboration with CMS reduces downside surprise risk .
  • Texas exposure: Uncertain need for additional Daybreak relief beyond Q2; watching Q-mix and legislative outcomes; other Texas operators subsidized by operations in other states; coverage above 1x but below mean .
  • Leverage/ATM: Opportunistic use of ATM to fund pipeline and reach target leverage (~4.7–5.0x sweet spot) after MRT close .
  • Manhattan project: Pre-leasing strong; rent levels tracking underwriting; occupancy expected to commence in Q1 2020 .

Estimates Context

  • Wall Street consensus (S&P Global) for Q1 2019 EPS and revenue was unavailable due to a temporary data access limit. As a result, we could not present beat/miss vs estimates. Values would typically be sourced from S&P Global.

Key Takeaways for Investors

  • Portfolio stabilization is translating into sequential AFFO improvement and robust dividend coverage; payout is high but expected to strengthen through 2019 as G&A normalizes .
  • Near-term stock narrative hinges on Texas: watch QIPP enrollment, NFRA legislative progress, PDPM implementation, and Daybreak cash collections in Q2–Q3; October policy changes are key catalysts .
  • The MedEquities merger diversifies asset classes and operator base; closing mid-May should support external growth and potential redeployment of Orianna proceeds at attractive cash yields (9–9.5%) .
  • Funding flexibility remains a lever: management may use ATM issuance to de-lever and fund acquisitions; monitor dilution risk against guidance ranges and leverage targets (~5x) .
  • Senior housing optionality: Inspir opening in early 2020 with strong pre-leasing; Maplewood relationship underpins a sizable senior housing platform (~$1.5B investments) .
  • Operating backdrop shows cautious optimism: occupancy stable at ~82.8% with PDPM set to improve margins; watch labor cost pressures which could offset some rate gains .
  • With consensus unavailable, focus near-term on hard metrics trajectory (revenue, AFFO/FAD, dividend coverage) and execution on redeployment/MRT integration to drive valuation and multiple expansion .
Note: All quantitative figures and statements are drawn from OHI’s Q1 2019 8-K press release and exhibits, Q1 2019 earnings call transcript, and prior-quarter materials cited inline.