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OMEGA HEALTHCARE INVESTORS INC (OHI)·Q4 2019 Earnings Summary

Executive Summary

  • OHI delivered solid Q4 2019 operating performance with revenues of $246.7M, AFFO of $0.78 per share, and FAD of $163.7M; dividend increased to $0.67 per share, implying an 86% AFFO payout and 93% FAD payout for the quarter .
  • Portfolio expansion was a key catalyst: closed the $735M Encore acquisition (60 facilities; ~$64M 2020 annual cash rent) and acquired a 49% U.K. senior housing JV for ~$93M .
  • 2020 guidance introduced: net income $1.58–$1.66 and Adjusted FFO $3.12–$3.20 per diluted share; CFO outlined assumptions including Maplewood rent ($21M annually), Daybreak cash basis, quarterly G&A $9.5–$10.5M, non‑cash revenue $16–$18M, and equity issuance $25–$35M per quarter .
  • Headwinds included a $35.7M real estate impairment, minimal rent recognized from Daybreak (~$0.5M in Q4), and higher interest expense from increased borrowings; PDPM feedback remained modestly positive, while MFAR presents medium‑term Medicaid risk in certain states .

What Went Well and What Went Wrong

What Went Well

  • Accretive external growth: closed $735M Encore portfolio and $93M U.K. JV; Encore adds ~$64M annual cash rent with 2.25–2.5% escalators . “The fourth quarter represented a strong conclusion to a very productive year” — CEO Taylor Pickett .
  • Dividend and payout metrics improved: Q4 dividend increased to $0.67; payout ratio strengthened to 86% of Adjusted FFO and 93% of FAD, expected to improve further in 2020 .
  • 2020 guidance and liquidity: AFFO guided to $3.12–$3.20; net funded debt/adjusted annualized EBITDA ~5.5x (pro forma ~5.1x); fixed charge coverage 4.0x; enhanced capacity from December equity forward settlement ($296M) .

What Went Wrong

  • Impairments and operator stress: $35.7M impairment to adjust 17 properties to fair value; Daybreak liquidity deterioration drove minimal rent recognition in Q3/Q4 and ongoing transitions/sales with expected eventual $15–$20M annual rent equivalents post transition .
  • Higher interest expense: $52.8M interest in Q4, up ~$4.2M YoY, reflecting higher borrowings and recent debt issuance .
  • Regulatory uncertainty: MFAR could eliminate incremental UPL funding and require provider tax compliance; potential impacts concentrated in Indiana, Texas, Utah with timing likely around 2024 .

Financial Results

MetricQ4 2018Q3 2019Q4 2019
Revenue ($USD Millions)$219.8 $233.2 $246.7
GAAP Diluted EPS ($)$0.31 $0.63 $0.27
NAREIT FFO per share ($)$0.59 $0.72 $0.77
Adjusted FFO per share ($)$0.73 $0.76 $0.78
Funds Available for Distribution (FAD, $USD Millions)$138.2 $156.6 $163.7
Operating Income ($USD Millions)$116.1 $187.2 $115.9

Segment revenue mix:

Revenue by Facility Type ($USD Millions)Q3 2019Q4 2019
Skilled Nursing/Transitional Care$191.1 $204.7
Senior Housing$28.0 $27.5
Real Estate Tax & Ground Lease Income$3.5 $2.4
Other (Investment & Misc.)$10.7 $12.0
Total$233.2 $246.7

Operator KPIs:

KPITTM ended Dec 31, 2018TTM ended Jun 30, 2019TTM ended Sep 30, 2019
Occupancy (%)82.8% 83.3% 83.4%
EBITDARM Coverage (Before Mgmt Fees)1.67x 1.66x 1.66x
EBITDAR Coverage (After Mgmt Fees)1.32x 1.30x 1.30x

Notes:

  • Daybreak rent recognized ~$0.5M in Q4; non‑cash revenue ~$14M; one‑time revenue $1.4M; impairment on real estate $35.7M; interest expense $52.8M .
  • Segment contractual rent concentration (annualized 2019 Q4) led by Ciena ($94.7M, 10.1%) and Consulate ($85.7M, 9.2%) .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
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 Raised low end
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
Net Income per diluted shareFY 2020N/A$1.58–$1.66 New
Adjusted FFO per diluted shareFY 2020N/A$3.12–$3.20 New
G&A expense per quarter ($M)FY 2020N/A$9.5–$10.5 New
Non‑cash stock‑based comp per quarter ($M)FY 2020N/A~$4.5 New
Non‑cash revenue per quarter ($M)FY 2020N/A$16–$18 New
Maplewood Carnegie Hill cash rent ($M)FY 2020N/A~$21 (annual) New
Equity issuance per quarter ($M)FY 2020N/A~$25–$35 New
Dividend per shareQ4 2019$0.66 $0.67 Raised

Earnings Call Themes & Trends

TopicQ2 2019 (Prior-2)Q3 2019 (Prior-1)Q4 2019 (Current)Trend
PDPM (Medicare reimbursement)Begins Oct 1; expected neutral‑to‑positive; operators prepared Initial feedback positive; modest revenue uptick expected Neutral to modestly positive revenue; rehab expense savings; coding adjustments; group/concurrent therapy adoption mixed Modestly positive, operational optimization ongoing
MFAR (Medicaid rule)Not highlightedNot highlightedCould eliminate UPL; provider taxes likely compliant; effective ~2024; state exposure considered (IN/TX/UT) Emerging medium‑term risk
Daybreak operatorTexas Medicaid rate pressure; will not revert to contractual rent; working to maximize cash flows $0.75M cash in Q3; expected $3–$5M per quarter range long‑term Minimal rent in Q3/Q4; transitions underway; expect eventual $15–$20M annual rent equivalents; impairments as assets pulled from master lease Active remediation; multi‑quarter transition
External growthSigned $735M Encore PSA; closed MedEquities $623M Closed $735M Encore; U.K. JV agreement ($90M) Encore closed ($735M); U.K. JV closed (~$93M) Continued portfolio scaling
Capital markets & leverageSold equity via ATM/DRIP; tightened FY19 guidance Issued $500M 3.625% notes; forward equity sale of 7.5M shares Settled forward for $296M; fixed debt 88%; net funded debt/Adj EBITDA ~5.5x (pro forma ~5.1x), FCCR 4.0x Improved flexibility; deleveraging focus
Maplewood Carnegie HillNot highlightedPre‑leasing expectations; $21M cash rent effective Jan 1, 2020, revenue recognized upon opening $21M cash rent in FAD starting Jan 1; revenue recognized after opening; cap interest ~$3M/qtr until occupancy Opening near-term; FAD benefit before GAAP revenue

Management Commentary

  • CEO strategic view: “We expect the momentum of 2019 to carry into 2020… PDPM has received positive feedback… we believe our operators are well‑positioned to weather continued labor cost pressures and generate solid financial performance over time” .
  • CFO modeling detail: “We assume… Maplewood will be paying approximately $21 million in annual rent… Daybreak… approximately $4 million to $5 million per quarter by the end of 2020 or the beginning of 2021… non‑cash quarterly revenue… $16 million to $18 million… G&A… $9.5 million to $10.5 million per quarter” .
  • COO on transitions: “Omega anticipates transitioning… the vast majority of Daybreak’s existing Omega facilities… expect… $15 million to $20 million in annual rent or rent equivalents” .
  • Corporate development: Carnegie Hill ALF high‑rise expected to open end of the quarter; senior housing portfolio totals $1.6B investment; pipeline ongoing with Maplewood .

Q&A Highlights

  • PDPM cadence and therapy mix: Modest revenue uptick with rehab cost savings; group/concurrent therapy adoption varies by operator; not enough data for portfolio‑wide percentage yet .
  • MFAR timing and impact: UPL likely eliminated; provider taxes likely retained; effective date likely around 2024; portfolio exposure considered in Indiana/Texas/Utah .
  • Daybreak clarity: Guidance assumes ~$3M annualized in 2020 with step‑up toward $4–$5M per quarter after transitions; potential additional non‑cash impairments as assets are carved from master lease for sale .
  • Carnegie Hill accounting: $21M cash rent included in FAD from Jan 1; GAAP revenue recognized post‑opening; cap interest (~$3M/qtr) flips off upon occupancy .
  • Debt/liability management: Considering terming out/issuing long-term debt to extend maturities and lower cost; not embedded in guidance yet .
  • Pipeline and sale‑leasebacks: Steady flow of small operator transactions; larger deals unpredictable; sale‑leaseback structures viewed favorably given improved industry certainty and demographics .

Estimates Context

  • S&P Global consensus estimates for Q2–Q4 2019 were unavailable due to SPGI daily request limits; therefore, we cannot definitively classify EPS or revenue as beats/misses versus Wall Street consensus at this time. Values retrieved from S&P Global.*

Where estimates may adjust:

  • Given 2020 AFFO guidance of $3.12–$3.20 and detailed assumptions (Maplewood, Daybreak cash basis, equity issuance), sell-side models may need to reflect earlier FAD inclusion of Maplewood cash rent and the staged Daybreak recovery .

Key Takeaways for Investors

  • External growth is driving 2020 run-rate: Encore’s ~$64M annual cash rent, U.K. JV, and multiple construction projects position OHI for incremental cash flows and portfolio diversification .
  • Dividend sustainability improved: AFFO payout at 86% and FAD payout at 93%, with 2020 guidance implying further improvement; supports income-oriented thesis .
  • PDPM is a modest positive; MFAR a watch item: Net neutral-to-positive PDPM impact and rehab cost savings help operator coverage; MFAR could pressure certain state Medicaid structures by 2024—risk appears manageable given OHI’s underwriting (no UPL in deals) .
  • Daybreak transition is key execution lever: Near-term earnings noise (low rent, impairments) should give way to stabilized $4–$5M quarterly rent by late 2020/2021 and $15–$20M annual rent equivalents—monitor transition pace and potential non‑cash impairments .
  • Balance sheet flexibility: Fixed debt 88%, FCCR 4.0x, net funded debt/Adj EBITDA ~5.5x (pro forma ~5.1x); recent $296M equity settlement expands capacity—room for opportunistic acquisitions and liability management .
  • Near-term trading implications: Stock could be sensitive to PDPM data points, MFAR headlines, and visibility on Daybreak transitions; positive catalysts include Carnegie Hill opening and incremental cash rent recognition .
  • Medium-term thesis: Demographic tailwinds, stable reimbursement, and disciplined sale‑leaseback growth support AFFO and dividend durability; watch regulatory developments and operator health, especially in higher-exposure states .