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OMEGA HEALTHCARE INVESTORS INC (OHI)·Q3 2019 Earnings Summary

Executive Summary

  • Q3 2019 results were solid: operating revenues rose to $233.2M, GAAP net income to $142.9M ($0.63 diluted EPS), with FFO of $0.72/share, AFFO of $0.76/share, and FAD of $156.6M .
  • Management raised FY2019 GAAP net income guidance to $1.70–$1.73/share and tightened AFFO to $3.04–$3.07/share; Q4 AFFO guidance remained $0.76–$0.79/share. Bolded changes are positive relative to prior quarter guidance. Raised FY GAAP net income guidance; tightened AFFO .
  • Strategic activity was a major catalyst: closed the $735M Encore SNF/ALF acquisition (approx. $64M 2020 cash rent) and agreed to purchase a 49% U.K. senior housing JV ($90M) .
  • Capital markets actions extended duration and funded growth: issued $500M 3.625% 2029 notes and entered a 7.5M share forward sale (~$300M), while increasing the quarterly dividend by $0.01 to $0.67 in October (dividend hike) .
  • Key overhang: Daybreak paid only ~$0.75M rent in Q3; management expects eventual rent equivalents of $15–$20M per year after restructurings and operational improvements and sees PDPM/QIPP/Medicare increases as tailwinds .

What Went Well and What Went Wrong

What Went Well

  • Closed the Encore Portfolio ($735M, 60 facilities), adding ~$64M of 2020 annual cash rent; plus a $90M U.K. JV purchase agreement to expand senior housing exposure .
  • Portfolio optimization: sold 19 facilities for $177M, recognizing ~$53.1M gain; completed $33M of new investments and $38M of capital projects in Q3 .
  • Management tone on PDPM constructive: “initial feedback from our operators is positive… we believe our operators are well-positioned…” (CEO) . CFO added modeling assumptions for Encore, PDPM, QIPP, and leverage trajectory (~5x pro forma) .

What Went Wrong

  • Daybreak underperformance: only ~$750K rent recognized in Q3; liquidity challenges tied to occupancy, mix, labor costs, and legacy obligations .
  • Straight-line receivable write-offs: ~$3.0M of non-collectible revenue (primarily straight-line) tied to operators on cash basis under new lease accounting .
  • Coverage stratification concerns: two top-10 operators slipped into lower coverage buckets; while deemed not “material,” analysts probed the broader implications (e.g., Signature preparation for PDPM, weighted-average coverage dipped modestly) .

Financial Results

Core Financials vs. Prior Periods

MetricQ1 2019Q2 2019Q3 2019
Operating Revenues ($USD Millions)$223.688 $225.279 $233.195
Net Income ($USD Millions)$72.182 $75.671 $142.948
Diluted EPS ($)$0.34 $0.34 $0.63
FFO per Share ($)$0.67 $0.71 $0.72
AFFO per Share ($)$0.76 $0.77 $0.76
FAD ($USD Millions)$145.240 $150.611 $156.564

Q3 YoY Comparison

MetricQ3 2018Q3 2019
Operating Revenues ($USD Millions)$221.852 $233.195
Net Income ($USD Millions)$59.062 $142.948
Diluted EPS ($)$0.28 $0.63

Segment Revenue Mix (by Facility Type)

MetricQ1 2019Q2 2019Q3 2019
Skilled Nursing/Transitional ($USD Millions)$179.383 $183.196 $191.052
Senior Housing ($USD Millions)$27.215 $27.707 $27.979
Real Estate Tax & Ground Lease ($USD Millions)$3.973 $3.005 $3.493
Other ($USD Millions)$13.117 $11.371 $10.671
Total Operating Revenues ($USD Millions)$223.688 $225.279 $233.195

KPIs (Occupancy and Coverage)

KPITTM Ended Dec 31, 2018TTM Ended Mar 31, 2019TTM Ended Jun 30, 2019
Occupancy (%)82.8% 82.7% 83.3%
Coverage Before Mgmt Fees (x)1.67x 1.67x 1.66x
Coverage After Mgmt Fees (x)1.32x 1.31x 1.30x

Non-GAAP adjustments impacting FFO/AFFO/FAD included non-cash stock comp, straight-line write-offs ($3.0M in Q3), restructuring costs, JV refinancing costs, and impairment charges as detailed in the press release schedules .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
GAAP Net Income per Diluted ShareFY 2019$1.44–$1.48 $1.70–$1.73 Raised
Adjusted FFO per Diluted ShareFY 2019$3.03–$3.07 $3.04–$3.07 Tightened (low end +$0.01)
GAAP Net Income per Diluted ShareQ4 2019$0.39–$0.42 $0.39–$0.42 Maintained
Adjusted FFO per Diluted ShareQ4 2019$0.76–$0.79 $0.76–$0.79 Maintained
Dividend per ShareQ4 2019 (declared Oct)$0.66 (prior quarterly) $0.67 (declared Oct 14) Raised

CFO cited the Encore closing, asset sales, Daybreak on cash basis, and capital markets actions as drivers for the updated ranges .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1/Q2)Current Period (Q3)Trend
PDPM (Medicare reimbursement)PDPM expected budget-neutral revenue, margin upside via therapy efficiencies; operators prepared for Oct 1 start Initial operator feedback positive; more clarity expected by Q1 2020; no underwriting change yet Improving sentiment
Daybreak (Texas operator)Cash-basis accounting; rent expected $3–$5M/quarter “for foreseeable future”; liquidity constrained; QIPP & PDPM tailwinds coming Paid ~$0.75M in Q3; management targeting $15–$20M per annum rent/rent equivalents post downsizing/transition; QIPP, PDPM, Medicare rate increase noted Near-term weak; medium-term constructive
External Growth / EncorePipeline “lumpy”; signed $735M agreement; 2020 cash revenue ~$64M; focus on Southeast Closed Encore on Oct 31; lease escalators 2.25–2.5%; HUD debt 3.66% blended assumed Executed; accretive cash rent
U.K. JVGrowing senior housing with Maplewood; U.K. operators performing flat-to-up; opportunistic expansion Agreed to buy Healthpeak’s 49% interest; cap rates “in the 7s”; potential future JV unwind/buyout Expanding footprint
Leverage & Capital MarketsConsider ATM issuance; net funded debt/EBITDA ~5.2x (Q1), 5.37x (Q2); fixed charge ~4.06x Issued $500M 2029 notes; 7.5M share forward sale; pro forma leverage ~5x after adjustments; ~90% fixed debt Terming out; deleveraging path
Senior Housing (Maplewood, NYC)Project cost ~$285M; early deposits trending to plan; stabilization ~24+ months Deposits pacing to 30–40% target at opening; rents on track; opening early 2020 On track
Skilled Mix & MedicaidMedicaid mix ticking up; Medicare length of stay pressure persists Skilled mix under pressure; Medicaid up as providers take all patients; LOS pressure abating slightly Mixed: Medicaid up; skilled mix pressured

Management Commentary

  • CEO: “Last week, we closed our previously announced acquisition of 60 facilities for $735 million… initial feedback from our operators [on PDPM] is positive… we believe our operators are well-positioned…” .
  • CFO: “Our pro forma leverage would be roughly 5x… we expect… ~$10.5 million in cash rent [from Encore] in Q4… assume HUD debt at a blended rate of 3.66%” .
  • COO: “We feel confident that Omega will eventually end up with rent or rent equivalents of between $15 million to $20 million per annum on our current Daybreak portfolio” .

Q&A Highlights

  • Daybreak trajectory: Q3 rent ~$0.75M; Q4’20 quarterly run-rate of $3–$5M after PDPM, QIPP, Medicare increases, and legacy cost roll-offs; selective downsizing and re-leasing in Texas underway .
  • U.K. JV economics: care-home cap rates “in the 7s”; mutual voting structure; optionality to buy out partner in future .
  • Encore operators: Consulate now a top operator; narrowed footprint to ~8 states; disciplined cost control; escalators 2.25–2.5% .
  • Coverage questions: two top-10 operators slipped buckets; management expects PDPM preparation effects to be temporary; weighted-average movement modest .
  • Capital markets: opportunistic terming out of debt; monitoring make-whole economics for potential refinancings .

Estimates Context

  • Wall Street consensus EPS and revenue estimates for Q3 2019 via S&P Global were unavailable at request time due to service limits. As a result, a beat/miss assessment versus consensus cannot be provided. Values should be sourced from S&P Global when accessible.
  • Note: S&P Global estimates unavailable at time of request.
Consensus MetricQ3 2019
Primary EPS Consensus Mean ($)N/A
Revenue Consensus Mean ($USD Millions)N/A

Key Takeaways for Investors

  • AFFO stability and FAD growth support the dividend increase to $0.67; payout discipline remains intact with AFFO coverage ~88% this quarter .
  • Guidance raised for FY GAAP net income and tightened for AFFO reflects accretive Encore closing, portfolio gains, and clarity on Daybreak cash basis—near-term optics improved while conservatism on cash recognition persists .
  • Encore adds ~$64M of 2020 cash rent with modest escalators and 3.66% HUD debt—favorable spread enhances earnings durability; Q4 models should include ~$10.5M cash rent contribution from this portfolio .
  • Daybreak remains the biggest risk/overhang; monitor Texas re-leasing progress, liquidity, and QIPP/PDPM traction into Q1 2020; the medium-term path to $15–$20M annual rent equivalents is constructive but execution-dependent .
  • Balance sheet improved: $500M 10-year notes, forward equity (~$300M), and ~90% fixed debt profile with pro forma leverage ~5x provide capacity for selective growth and de-risking .
  • Senior housing strategy (Maplewood, U.K.) broadens cash flow sources; NYC project pre-leasing on plan with 24+ month stabilization—watch for ramp dynamics in 2020–2021 .
  • Without consensus estimates, trade the narrative: dividend hike + guidance raise + Encore closing are positive catalysts; near-term stock reactions likely hinge on PDPM/QIPP early readouts and Daybreak transition headlines .