Omega Healthcare (OHI) announced third quarter results last
night that took many investors by surprise, sending the stock down as much as
10% in early trading this morning.
For those who are unfamiliar with the company, Omega
Healthcare is a real estate investment trust (REIT) that provides financing and
capital primarily to skilled nursing facilities (SNFs). In fact, Omega is the
largest SNF-focused REIT and generates 84% of its revenue from SNFs.
Patients discharged from hospitals are sent to SNFs when
they still require care or rehab before they can be sent home. Compared to
hospitals, SNFs can provide short-term care on a more affordable basis to save
healthcare costs.
Several of Omega’s tenants are under financial pressure,
which caused the company to place one of them (Orianna Health Systems) on a
cash basis for accounting purposes after the operator continued missing its
budget and failed to pay its monthly rent obligations.
In other words, Omega Healthcare will only recognize revenue
from this operator as it receives cash. Omega plans to move some or all of
Orianna’s properties to new operators over the next six months or so, but
annual contracted rent from the properties is expected to decrease from $46
million to a range of $32 million to $38 million once the transition is
complete.
In addition to Orianna, management commented that Signature,
the company’s third-largest operator (6.7% of annualized third quarter revenue),
was facing liquidity challenges to pay rent on a timely basis.
Signature fell further behind schedule during the third
quarter, although the vast majority of its rent due is covered by a revolving
credit agreement.
Omega was also looking at deferring 10% of total rent from
Signature (around 0.67% of company-wide rent) for three years, so this doesn’t
seem to be a huge concern for now.
Regardless, when combined with Orianna, these two tenants
accounted for close to 12% of annualized contractual rent during the third
quarter.
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