Earnings Call Transcript - OHI Q2 2024

Operator, Operator

Greetings, and welcome to the Omega Healthcare Investors Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After today's presentation, there will be a brief question-and-answer session. As a reminder, this conference is being recorded. I would now like to turn the conference over to Michele Reber. Thank you. You may begin.

Michele Reber, Moderator

Thank you, and good morning. With me today is Omega's CEO, Taylor Pickett; COO, Dan Booth; CFO, Bob Stephenson; 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.

Taylor Pickett, CEO

Thanks, Michele. Good morning, and thank you for joining our second quarter 2024 earnings conference call. Today, I will discuss our second quarter financial results and certain key operating trends. Second quarter FAD fund is available for distribution of $0.68 per share was better than expected and should continue to improve as several portfolios are in the process of being transitioned, which will result in FAD upside over the next few quarters. Our dividend payout ratio is now below 100% and should continue to drop into the mid-90% range in the upcoming quarters. As a result of year-to-date portfolio transitions and acquisitions, we have narrowed and increased our 2024 AFFO guidance to a range of $2.78 per share and $2.84 per share. We have issued a significant amount of equity to fund our robust pipeline, which has helped to further deleverage the balance sheet. As Dan will discuss key tenant occupancy and rent coverage metrics continue to improve. The under one-time EBITDAR coverage operator metric dropped to 8.9% of total rent. And looking at the 8.9% balance of below one times operators, we can break the 8.9% into two buckets Operators representing 6.1% of 8.9%, our strong credits, and therefore, payment of rent should not be an issue. That leaves operators representing 2.8% consisting of eight small relationships. On July 24, we as the 49% minority partner in a real estate joint venture closed on the acquisition of the remaining 51% joint venture interest. We now own a 100% interest in the 63 U.K. facilities previously owned by the joint venture. The acquisition included the assumption of $243 million in secured debt. It is our intention to repay the secured debt in November 2025 as prepayment of the debt prior to November of 2025 will result in significant prepayment penalties. The interest rate of 10.38% on the assumed debt is significantly above Omega's debt market rates. For GAAP accounting purposes, the above-market portion of the interest expense is capitalized as part of the joint venture acquisition. We intend to use this same GAAP accounting treatment for our FFO, adjusted FFO and FAD calculations. Lastly, after more than four years of COVID-related industry issues, the industry has generally recovered to pre-COVID operating metrics. The combination of strong demographics and limited or no new supply should bode well for our operating partners. I will now turn the call over to Bob.

Bob Stephenson, CFO

Thanks, Taylor, and good morning. Turning to our financials for the second quarter. Revenue for the second quarter was $253 million compared to $250 million for the second quarter of 2023. The year-over-year increase is primarily the result of the timing and impact of operator restructurings, transitions and revenue from new investments completed throughout 2023 and 2024, partially offset by asset sales completed during that same time period. Our NAREIT FFO for the second quarter was $189 million or $0.72 per share as compared to $155 million or $0.63 per share for the second quarter of 2023. Our adjusted FFO was $185 million or $0.71 per share for the quarter, and our FAD was $177 million or $0.68 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 second quarter financial supplemental posted to our website. Our second quarter FAD was $0.023 greater than our first quarter FAD. As outlined in our press release, the Guardian portfolio did not pay in Q1 and was transitioned to a new operator in April with an annual base rent of $5.5 million and additional annual rent up to $6.9 million based on the new operator's revenue. In the second quarter, we received rental income of $2.8 million from the new operator, which consisted of $1.3 million of base minimum rent and $1.5 million of incremental rent. Turning to LaVie. They paid an additional $1.5 million in the second quarter as the rent payment increased from $1.5 million per month to $3 million per month starting in June. And lastly, Maplewood paid $11.8 million of rent in the second quarter versus $11.3 million in the first quarter. In July, Maplewood paid $4 million in rent. Our balance sheet continues to remain strong. On April 1, we repaid our maturing $400 million senior unsecured bond using $360 million of balance sheet cash, April 1 rent collections and borrowed the balance on the credit facility. In the second quarter, we completed $221 million in new investments, excluding CapEx and funded the investments through the issuance of 7.6 million shares of common stock or $245 million in equity proceeds under our ATM program. We ended the quarter with over $35 million in cash on the balance sheet and over $1.4 billion in credit facility borrowing capacity. At June 30, 99% of our $4.7 billion in debt was at fixed rates, our net funded debt to annualized adjusted EBITDA was 4.76 times, down from 5.0 times in the first quarter, and our fixed charge coverage ratio was 4.3 times. Turning to guidance. As Taylor mentioned, we increased our full-year adjusted FFO guidance to a range between $2.78 to $2.84 per share. A few of the key assumptions are we're assuming no change in our revenue related to operators on an accrual basis of revenue recognition. We're assuming LaVie continues to pay at the existing rate of $3 million per month and Maplewood's ability to pay contractual rent continues to improve. We're assuming the new operator of the Guardian transition facilities will continue to pay rent of $2.8 million per quarter, consistent with the second quarter. We're assuming $77 million in asset sales in the second half of the year related to facilities classified as assets held for sale at the end of the second quarter, for which we recorded $1.4 million in revenue in the second quarter. We've included the annual impact of the 2024 investments and assumed debt completed through July 31 as outlined in the press release. We project our quarterly G&A expense to continue to run between $11.5 million to $13.5 million per quarter. We assume no material changes in market interest rates as they relate to either interest earned on our balance sheet cash or interest expense charge or credit facility borrowings. Additionally, our $245 million in ATM proceeds in the second quarter were raised through equity predominantly issued in June. As such, the 7.6 million shares issued only had a weighted average diluted impact of 2.3 million shares in the second quarter. Had all the shares been included within the weighted average, adjusted FFO would have been diluted by approximately $0.01. Our weighted average shares for the third quarter will include the full impact of the 7.6 million shares, plus any additional shares issued as we continue to fund new investments accretively with equity while maintaining leverage under five times. As a reminder, for every 4 million shares issued, our quarterly adjusted FFO is negatively impacted by approximately $0.01 per share until the cash is put back to work in new investments. Our 2024 adjusted FFO guidance does not include any additional investments or asset sales as well as any additional capital transactions other than what has already been mentioned. I will now turn the call over to Dan.

Dan Booth, COO

Thanks, Bob, and good morning, everyone. As of June 30, 2024, Omega had an operating asset portfolio of 900 facilities with approximately 86,000 operating beds. These facilities were spread across 77 third-party operators and located within 42 states in the United Kingdom. Trailing 12-month operator EBITDAR coverage for our core portfolio as of March 31, 2024, increased to 1.42 times versus 1.33 times for the trailing 12-month period ended December 31, 2023. Occupancy for our overall core portfolio has continued to recover from a low of 74.6% in January of 2022 to 80.8% as of mid-July 2024 based upon preliminary reporting from our operators. Turning to portfolio matters. LaVie, as previously announced, will file for Chapter 11 bankruptcy protection on June 2, 2024, in the Northern District of Georgia. Omega believes this filing was a necessary and important step in creating an entity that is operationally solvent and sustainable with enhanced liquidity and a strengthened balance sheet. We continue to believe that there is meaningful value in our portfolio of current LaVie assets. Omega has been working with LaVie for over a year to assist it in reducing its continued exposure to underperforming assets, which in turn has alleviated some of the financial burdens on the current LaVie portfolio. We believe the current cash flow generated by our remaining LaVie portfolio is sustainable and will support long-term annualized rent of approximately $36 million, while also retaining sufficient cash within the business to provide for strong clinical care. LaVie paid approximately $3 million in rent in the months of June, July, and August of 2024. Although the bankruptcy proceedings are still in process, Omega anticipates that the final resolution will be concluded prior to year-end of 2024. In addition to the aforementioned restructurings, Omega is working with several other relatively small operators on various restructurings. Turning to new investments. During the second quarter of 2024, Omega completed a total of $254 million in new investments, inclusive of $33 million in CapEx investments. The new investments have a weighted average cash yield of 10.4% with annual escalators ranging from 2% to 2.5% and include the following, the $62.7 million sale-leaseback transaction, whereby Omega acquired 32 care homes in the U.K. and leased these facilities back to a new operator, a $31 million sale-leaseback transaction, whereby Omega acquired one facility in Michigan and leased it back to an existing operator, a $21 million sale-leaseback transaction where Omega acquired one facility in Louisiana and leased it back to a new operator and four separate loans to existing operators totaling $106 million. Subsequent to the second quarter of 2024, Omega closed on $373 million in new investments, excluding CapEx. These investments include the aforementioned buyout of our 51% JV partner and 63 care homes in the U.K. The facilities are leased to two established U.K. operators with current annual rent of $43.6 million. Omega's total investment is now $436 million, which results in a gross return of 10%. Year-to-date through July, Omega has closed on $702 million in new investments, inclusive of CapEx investments through the second quarter. I will now turn the call over to Megan.

Megan Krull, SVP of Operations

Thanks, Dan, and good morning, everyone. As discussed last quarter, the staffing mandate was finalized in April despite the inability of most facilities to meet the requirements and with limited visibility into the structural implications from a labor perspective in terms of how to create access to the level of staffing required of the mandate. While it is unlikely that I need the levers legislative or otherwise, to adjust or overturn the rule would be successful prior to the election, it is important to note that as previously expected, certain industry associations, along with several operators have filed a lawsuit to overturn the mandate. Although it will take some time for the outcome of the lawsuit to be determined, both the Supreme Court's recent move to overturn the Chevron doctrine, which gave reference to regulatory bodies and interpreting laws and the fact that the attorney who successfully argued for Chevron to be overturned is the same as being used in the case against the mandate, certainly appear to weigh in favor of the ultimate success of the lawsuit against the staffing mandate. The fundamentals of the business continue to improve. While not at pre-pandemic levels, occupancy has stabilized and the recovery from a coverage perspective is indicative of the fact that many states have and continue to step up in meaningful ways to provide the support necessary in recovery efforts. We hope they do the same in the face of any and all regulatory pressures going forward. CMS as well issued its final 2025 payment rule this week, resulting in a net increase of 4.2% or approximately $1.4 billion, which is slightly better than the 4.1% provided for in the proposed rule. This included a 3% market basket increase, plus a 1.7% market basket forecast error adjustment, offset by a 0.5% productivity adjustment. So while there continues to be and likely always will be some level of pressure on the industry from a regulatory perspective, hopefully, cooler heads will always prevail and the ultimate scrutiny will be well balanced and achieve a level of reasonableness indicative of an understanding of the industry as a whole. I will now open the call up for questions.

Operator, Operator

Thank you. We will now be conducting the question-and-answer session. Our first question is coming from the line of Jonathan Hughes with Raymond James. Please proceed.

Jonathan Hughes, Analyst

Good morning. Thank you for the prepared remarks and commentary. I was hoping you could share some details of what the investment pipeline looks like today in terms of size, yields, skilled nursing versus assisted living and then acquisitions versus loans?

Taylor Pickett, CEO

Sure. As we mentioned last quarter, our pipeline is currently very active. We're observing numerous deals both in the U.S. and the U.K. Our average yield is slightly above 10%, which aligns with market trends. Up to July 2024, we completed just over $700 million in deals, compared to just over $300 million during the same period last year. This means we have more than doubled our activity, thanks to a very active pipeline.

Jonathan Hughes, Analyst

Okay. Are you seeing any more private capital competitors come back to the space? Or are they still largely on the sidelines due to the challenging bank lending environment?

Taylor Pickett, CEO

So we haven't seen them. So if they've come back, we're not seeing them in any material.

Jonathan Hughes, Analyst

Okay. And then just one more for me for Bob. The equity raise via the ATM in the quarter, I think it was the most in the second quarter last year and obviously as an accretive source of capital to fund acquisitions and leverage is now sub five times. Hoping you could just talk more about how you think of funding investment activity going forward and early thoughts on addressing the 2025 debt maturities? Thanks

Bob Stephenson, CFO

Absolutely. I think your first statement hit it that we could do all acquisitions accretively using equity right now, and we want to continue to do that to maintain our leverage less than five times. So I would look, you know, looking forward, we'll continue to do that.

Jonathan Hughes, Analyst

And then just thoughts on the maturities for next year?

Bob Stephenson, CFO

Yes. We have $400 million coming up in January 15, and we'll get in front of that similar to the way we got in front of our $400 million that we just paid off in April. So in the fourth quarter, we'll sit down and look at the market to see whether it's bond for bond, but more likely it would be equity.

Jonathan Hughes, Analyst

Thanks for the time.

Operator, Operator

Thank you. Our next question is coming from the line of Michael Griffin. Please proceed with your question.

Michael Griffin, Analyst

Thanks. I would like to know more about the buyout of your partner's stake in the Cindat joint venture. Were there any capital or liquidity issues that your partner faced? Was your desire for them to sell their stake a key factor in this decision? Additionally, you mentioned the interest rate on it. If you were to refinance when the debt is due next year, what kind of benefit from the accretion do you expect to achieve?

Taylor Pickett, CEO

Yes, Michael, I had a bit of trouble hearing you, but I believe I understood your question. When we initially established the joint venture, we included buy-sell provisions. We determined that the market timing was right to act on that. The 51% partner had the chance to match the bid and buy us out, but they chose not to. We believed we secured it at a very appealing price, considering the 10% yields on that asset. Unfortunately, it came with certain terms that are not very favorable. Our cost of debt capital is approximately 6%, which gives us a differential of 4.38% on $243 million. Essentially, that's the benefit we anticipate from the refinancing.

Michael Griffin, Analyst

Great. Appreciate the color there, Taylor. And then just on the Guardian portfolio. Just wanted to get a sense, is there something that the new operator is doing differently that Guardian wasn't? I thought Pennsylvania was a relatively tough state to operate in, but any color you have there would be helpful.

Taylor Pickett, CEO

I may not have heard the entire question. The facilities in Pennsylvania were facing challenges. In the second quarter, we implemented a distinctive rent structure that included a revenue kicker, which activated if the operator performed well. They did perform well, and as a result, we received the increased rent in the second quarter. We anticipate continuing this arrangement for the rest of the year.

Michael Griffin, Analyst

Great. That's it for me. Thanks for the time.

Operator, Operator

Thank you. Our next question is coming from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.

Jamie Feldman, Analyst

Thank you for taking my question. To start, you have several mortgage and real estate backed investments maturing in 2024 and 2025. Can you discuss your plans for those investments and the potential to reinvest that capital at a similar rate? How do you anticipate that affecting earnings?

Taylor Pickett, CEO

We have some mortgages that are set to mature over the next approximately 12 months. None of them are particularly significant. We anticipate that some will be paid off and others will be extended. I don't expect a lot of funds to revert back, but most of these are short-term loans with some mezzanine financing mixed in.

Jamie Feldman, Analyst

Okay. Do you think it ends in 2024, and for 2025, do you think it will be neutral to earnings or do you think something else?

Taylor Pickett, CEO

Yes, it shouldn't have any material impact at all on earnings.

Jamie Feldman, Analyst

Okay. It seems like the investment environment has been quite favorable this year. Can you discuss what you are observing, particularly in the U.K., where it appears there have been more opportunities lately? How much do you anticipate investing there and what does the opportunity set look like moving forward?

Taylor Pickett, CEO

Both the U.S. and the U.K. are quite active right now. I think what we have going for us in the U.K. is that there's not as many capital players over there just yet. I mean, they had a quicker recovery overall from COVID. So we got in there pretty quick. And we haven't seen a lot of capital players come into that market yet. So we're able to pick and choose, and we are being opportunistic at this point in the U.K., looking at really kind of all facets of aeromes.

Jamie Feldman, Analyst

Okay. Well, how would you frame like the magnitude of the investment opportunity?

Taylor Pickett, CEO

I believe the pipeline that has generated opportunities in the first seven months of this year remains unchanged. While it’s difficult to predict when certain developments will occur, the pipeline continues to present a similar set of opportunities.

Jamie Feldman, Analyst

Okay. And then finally, can you just give an update on the Second Avenue Maplewood project? What are your thoughts on lease up, how you think that develops into the back half of '24 and early '25?

Taylor Pickett, CEO

Yes, Second Avenue is experiencing growth in a market filled with new products. We were the first to enter, but three additional buildings have opened in Manhattan since then. Currently, we are 67% occupied, and this figure is expected to improve. It's important to note that the building has matured, meaning there have been some resident changes due to passings, which are being addressed by incoming new residents. While predicting a reach of 90% occupancy is challenging, there is certainly a path forward, and operations remain strong.

Jamie Feldman, Analyst

Okay. All right. Thank you for your thoughts.

Operator, Operator

Thank you. The next question is coming from the line of Vikram Malhotra with Mizuho. Please proceed with your question.

Vikram Malhotra, Analyst

Morning. Thanks for taking the question. I just wonder if you could expand on the Maplewood point and maybe just also give us an update just on DC. But just in New York, it seems like you said there's a lot of competition, maybe some discounting, lease-ups a bit slower. Any statistics you can share like I think you did at NAREIT to give us some ticks on move-in, move-out sort of occupancy. Just what are you anticipating for the lease up to sort of a run rate where you can get full rent?

Taylor Pickett, CEO

Yes. Timing is difficult to predict. However, there has been some discounting of products in Manhattan. Luckily, there isn't significant price sensitivity there. If a property is attractive, prices can generally be maintained. For example, Second Avenue, which has 120 residents, is already a lively community and shows exceptionally well. This is why we can achieve a RevPAR of $22,000 a month. I believe everything is progressing positively. To address your question about reaching 67% to 90%, I would say it's unlikely to happen this year; you might be looking at 2025. Regarding Maplewood, there are three main points with that team: transitioning operations out of the Greg Smith state, stabilizing the operating balance sheet, and ramping up Second Avenue. The balance sheet has stabilized, the transition of operations is underway, and the ramp-up is in progress. The rest of our core portfolio, comprising the other 16 facilities, is performing extremely well, providing a solid foundation that fully supports the current rent, and we feel optimistic about the outlook. Again, timing is challenging to predict.

Vikram Malhotra, Analyst

Thanks. Bob, I wanted to follow up on the share count impact you mentioned for the third quarter. Based on everything related to FAD, is it correct to say that your $0.68 for the quarter is expected to rise to around $0.70 to $0.71 in the second half?

Bob Stephenson, CFO

That's the math that would fit the rate change.

Vikram Malhotra, Analyst

Got it. Okay. Just to clarify, you mentioned the acquisitions that closed in the quarter. That also includes the loans as well as the deals you've made, impacting the 3Q and 4Q, correct? Regarding the deal you announced in 3Q, I wanted to clarify the timing of those deals so we can accurately model it for the third and fourth quarter.

Bob Stephenson, CFO

We've baked those in. I said all acquisitions completed through July 30 were baked into the guidance.

Vikram Malhotra, Analyst

Got it. Okay. Thanks so much and congrats on a strong quarter.

Operator, Operator

Thank you. Our next question is coming from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Unidentified Analyst, Analyst

This is Robin filling in for Juan. Just curious on Maplewood, why did the Washington D.C. development budget increase by $50 million?

Taylor Pickett, CEO

Yes. DC, that really relates to what we've seen in construction costs over the last three years, not just in this industry, but across almost all construction industries this 25% increase, and it just reflects the fact that when we close this out, that's what it's going to end up costing.

Unidentified Analyst, Analyst

Okay. And on the sub-1 coverage, what's the expected trend into '25? And how low can this exposure recently get to?

Taylor Pickett, CEO

I see a few interesting points here. Several operators have EBITDAR coverage above 1, and some of these will likely move out of that category, including the largest operator. Additionally, we are working through restructuring with a number of smaller operators, and I believe they will also exit that category. Our goal is to settle at less than 2% by 2025, which is consistent with our historical range of 2% to 4% over the last 20 years.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

Thank you. Our next question is coming from the line of Justin Hasbeak with RBC Capital Markets. Please proceed with your question.

Unidentified Analyst, Analyst

Thanks. You mentioned that the new operator for the Guardian assets can continue to pay $2.8 million in total quarterly rent for the remainder of the year. How should we think about this portfolio going forward into next year? And just how volatile could this rent be going forward?

Taylor Pickett, CEO

Once again, it's revenue, there's revenue-based kickers. So we could move around. But right now, based upon second quarter results, we think that that's sustainable, and that's what we're going to see going forward.

Operator, Operator

Thank you. We'll move on to our next question, which is coming from the line of Alex Fagan with Baird. Please proceed with your question.

Alex Fagan, Analyst

Hello. Good morning. Thank you for taking my question. First on the Cindat JV, which you guys bought out, how are the two operators in that portfolio performing? Can you share any metrics about EBITDAR coverage or anything else?

Taylor Pickett, CEO

Their coverage is consistent with what we see in our overall portfolio. So nothing unusual there in terms of underwriting really cut down the middle type portfolios for us.

Alex Fagan, Analyst

All right. And would you be able to provide an update on the $109 million of other real estate loans that were due in 2024 that were extended from March 29 on June 28, were those paid out? Or just any update there?

Taylor Pickett, CEO

Yes. I mean it's a fully collateralized loan. There's plenty of liquidity in a market that's a little tough to borrow. And so we were very comfortable extending that line out.

Alex Fagan, Analyst

But the loan was extended to June 28, 2024, has that been paid back or extended again?

Taylor Pickett, CEO

You know what, we're all looking at each other trying to figure out what loan it is. Can I just have Bob circle back with you on that because I don't want to state anything.

Alex Fagan, Analyst

Yes. No worries. That's it for me. Thank you, guys.

Operator, Operator

Thank you. The next question is coming from Joshua Dennerlein with Bank of America. Please proceed with your question.

Unidentified Analyst, Analyst

This is Carl Grades speaking on behalf of Josh. I would like to ask about the Guardian assets and the new tenants. I want to understand the mechanics regarding the rent and whether the revenue kicker is evaluated throughout the quarter. Should we be considering a specific timing adjustment if they meet certain revenue goals for the potential increase?

Taylor Pickett, CEO

So it was evaluated in the second quarter. As I indicated, they did meet the criteria of having the take or kick in to the extent that we reported it, we do believe it's sustainable. It will continue to go quarter after quarter throughout the year. There's no more magic to it.

Unidentified Analyst, Analyst

Or at least does it get reevaluated from going forward for that excess amount that they could continue to go up?

Taylor Pickett, CEO

Once again, I think that the revenue that they recorded in the second quarter is sustainable. So I don't think it's going to go either up or down, it's going to pretty much remain flat.

Unidentified Analyst, Analyst

Okay. Thank you so much. And also in terms of the uptick that we saw in the occupancy and coverage data of your operators, is there any specific, at least facility type or operator that's performing better than others or a standout?

Megan Krull, SVP of Operations

I mean I think we've historically since COVID seen the ALF product come back a little bit quicker. But I think generally speaking, we're seeing census increase at all of them. The Smith is now so catching up.

Unidentified Analyst, Analyst

Okay. Thank you so much.

Operator, Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Taylor Pickett for closing comments.

Taylor Pickett, CEO

Thanks, everyone, for joining our call today. Please feel free to follow up with the team.

Operator, Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. We thank you for your participation.