Omega sells 29 Lavi nursing homes for $305 million, adjusts to Guardian’s exit from the industry

Omega Healthcare Investors (NYSE: OHI) has sold 29 LaVie facilities for gross proceeds of $305 million. The Nov. 1, 2023 sale represents a significant reduction in Omega’s exposure to LaVie assets, reducing the associated risks, CEO Taylor Pickett said Friday during the company’s third-quarter 2023 earnings call.

Also on the call, Omega leaders commented on the REIT’s plans following the industry exit from Guardian Healthcare. Guardian’s decision to exit came as a “huge surprise” to Omega’s leaders, said Dan Booth, Guardian’s chief operating officer. But Beckett said the situation with the Guardian was “very private” and should not be seen as the beginning of a wave of exits.

He also noted that Omega’s financial performance in the third quarter exceeded expectations due to higher-than-expected interest income and unexpected lease payments from some operators on a cash basis.

The company’s adjusted funds from operations (FFO) per share of $0.71 beat analyst consensus estimates.

“SNF operator fundamentals are improving due to stronger Medicare and Medicaid rates, higher occupancy and lower agency labor utilization,” Stifel analysts commented in an earnings note. “While there will always be tenant issues (in the best and worst of times), we believe the bulk of the issues are behind us.”

The Stifel team also noted that with capital markets “restricted”, REITs like Omega are among the few buyers who can make acquisitions. Omega leadership said they were prepared to do this from a financial perspective.

“With more than $600 million in cash available as of November 1 and more than $1.4 billion available under our line of credit at the end of the quarter, we are well positioned to fund our pipeline and future debt obligations,” Pickett said.

Lavi wallet

One of the main topics of the call was the transformation of LaVie’s Omega portfolio, through the sale and transfer of a number of facilities.

In total, 48 facilities were transferred from LaVie’s portfolio during Omega’s restructuring efforts. These transformations included complete asset sales and leaseback agreements, effectively simplifying the portfolio.

Following the recent sale of the 29 facilities, Omega expects to relocate six more. This would leave Omega with 31 LaVie properties, located in North Carolina, Virginia, Pennsylvania, Mississippi and Florida.

These are “very strong states,” Beckett said, and the LaVie portfolio going forward should generate “a tremendous amount of cash flow, which supports a lot of rentals.”

He added that Omega is still “chopping wood” to complete the portfolio restructuring and that the exact timing is still in question.

LaVie’s remaining portfolio is now expected to perform well, providing cash flows covering more than 1.0x EBITDAR, company officials said.

Exit of the trustee from the industry

Guardian previously entered into a restructuring agreement with Omega, resulting in the sale of 12 facilities, eight in Pennsylvania and four in Ohio. Beckett said that these measures aim to stabilize its financial position.

In May 2022, Guardian resumed full contractual rent and interest payments on its remaining portfolio of 16 properties, signaling a potential turnaround. However, the company derailed that path and stopped making contractual lease payments in the third quarter, which amounted to about $1.5 million per month. In response, Omega used Guardian’s $7.3 million security deposit to cover the rental payments.

With the security deposit expected to be significantly exhausted after the full contractual rent was implemented until December of this year, Beckett said they are addressing the situation.

“Since becoming aware of this situation, Omega has sought to re-lease the remaining six facilities with the goal of completing the transformations by the end of the year,” Beckett said. “At this stage, Omega is in discussions with a potential new tenant with a view to closing at the end of the year, subject to normal due diligence, satisfactory documentation and regulatory approvals.”

While the decision to exit the skilled nursing sector surprised Omega’s leadership, Booth noted the difficulties the chain has faced.

“They’ve been struggling lately,” he said. “They had profound liquidity issues and decided to exit, and we are looking to replace them as operators.”

Omega has several relationships with operators in Guardian’s markets of Pennsylvania and West Virginia, and the REIT is currently working to identify the right team to move into, Pickett said.

Work, occupancy and the impact of the employment mandate

The labor shortage issue has been an ongoing challenge for the skilled nursing industry, Megan Kroll, senior vice president of operations at Omega, said during the earnings call.

Although the sector has shown signs of improvement, the effects are still far from uniform. Some facilities have been able to recover from the low levels experienced during the peak of the pandemic, while others are still experiencing staffing shortages.

Florida, for example, continues to be a region facing significant staffing challenges, which has hampered a recovery in occupancy rates. These disparities underscore that employment challenges are far from resolved and continue to impact the sector’s ability to provide care and support to residents.

She said occupancy rates were on a slow path to recovery within the Omega portfolio. The recovery has been uneven, with significant regional variations. Facilities in areas with severe staffing shortages have found it more difficult to regain pre-pandemic occupancy levels. Kroll pointed out that 26% of the basic facilities that have not yet been fully restored are still at 84% or more occupancy.

“From an occupancy perspective, the slow positive trends have continued with the number of essential facilities now recovering to 37%, up slightly from the 35% recorded in the first quarter,” she said. “In addition, 26% of essential facilities that have not yet fully recovered have occupancy of 84% or greater. While the staffing shortage situation continues to slowly ease, there is still significant variation by market and occupancy is still believed to have been impacted.”

Another important factor looming in the skilled nursing sector is the impending staffing mandate proposed by the Centers for Medicare and Medicaid Services (CMS), Kroll said.

She noted that although the proposed staffing mandates involve delaying implementation, they present complex challenges for the industry.

These requirements, which are not yet funded, create uncertainty about how realistic they are to achieve and the financial burden they may impose on facilities, she said. CMS is currently in a comment period on these mandates, and the outcome remains uncertain.

“We’re just waiting to see what comes out in the end,” she said. “But rural areas are certainly going to be hit a little harder than urban areas once this gets going. And in terms of setting rates, again, none of those rates are affected by the hiring mandate at this point but we are.” Especially watch our top 10 states very carefully and have seen positive things over the past few months.