Omega Healthcare Investors, Inc. Value Stock - Dividend - Research Selection
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Description of the company
Omega Healthcare Investors, Inc. (“Omega”) was formed as a real estate investment trust (“REIT”) and incorporated in the State of Maryland on March 31, 1992. All of Omega's assets are owned directly or indirectly, and all of Omega's operations are conducted directly or indirectly, through its subsidiary, OHI Healthcare Properties Limited Partnership (“Omega OP”). Omega OP was formed as a limited partnership and organized in the State of Delaware on October 24, 2014. No substantive assets were owned or activity occurred in Omega OP until the merger with Aviv REIT, Inc. on April 1, 2015. Unless stated otherwise or the context otherwise requires, the terms the “Company,” “we,” “our” and “us” means Omega and Omega OP, collectively.
The Company has one reportable segment consisting of investments in healthcare-related real estate properties located in the United States (“U.S.”) and the United Kingdom (“U.K.”). Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities (“SNFs”), and, to a lesser extent, assisted living facilities (“ALFs”), independent living facilities and rehabilitation and acute care facilities. Our core portfolio consists of long-term leases and mortgage agreements. All of our leases are “triple-net” leases, which require the tenants to pay all property-related expenses. Our mortgage revenue derives from fixed rate mortgage loans, which are secured by first mortgage liens on the underlying real estate and personal property of the mortgagor.
In April 2015, Aviv REIT, Inc., a Maryland corporation (“Aviv”), merged (the “Aviv Merger”) with and into a wholly owned subsidiary of Omega, pursuant to the terms of that certain Agreement and Plan of Merger, dated as of October 30, 2014 (the “Merger Agreement”), by and among Omega, Aviv, OHI Healthcare Properties Holdco, Inc., a Delaware corporation (“OHI Holdco”), Omega OP, and Aviv Healthcare Properties Limited Partnership, a Delaware limited partnership (the “Aviv OP”).
Prior to April 1, 2015 and in accordance with the Merger Agreement, Omega restructured the manner in which it holds its assets by converting to an umbrella partnership real estate investment trust structure (the “UPREIT Conversion”). As a result of the UPREIT Conversion and following the consummation of the Aviv Merger, all of Omega’s assets are held by Omega OP, through its equity interests in its subsidiaries. Omega OP is governed by the Second Amended and Restated Agreement of Limited Partnership of OHI Healthcare Properties Limited Partnership, dated as of April 1, 2015 (the “Partnership Agreement”). On September 26, 2017, OHI Holdco, a wholly owned subsidiary of Omega and a co-general partner of Omega OP, was merged with and into Omega, resulting in Omega becoming the sole general partner of Omega OP. Omega has exclusive control over Omega OP’s day-to-day management pursuant to the Partnership Agreement. As of December 31, 2017, Omega owned approximately 96% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and investors owned approximately 4% of the outstanding Omega OP Units.
In 2017, we completed the following transactions totaling approximately $559 million in new investments:
· $124 million of new investments with a new operator in U.K. The investments included 18 care homes (similar to ALFs in the U.S.) from an unrelated third party for $124.2 million (including a non-cash deferred tax liability of approximately $8.2 million) and leased them to a new operator. The 18 care homes were combined into a single 12-year master lease with two ten year renewal options. The master lease has an initial annual cash yield of 8.5% with 2.5% annual escalators.
· $220 million of new investments with an existing operator. The investment included 15 SNFs for $211.0 million and a $9.4 million leasehold mortgage acquired from an unrelated third party. The 15 SNFs, located in Indiana, were being operated by an existing operator of the Company. The SNFs were added to the operator’s existing master lease with an initial annual cash yield of 9.5% with 2.5% annual escalators.
· In addition to the aforementioned investments, we also acquired 7 SNFs and 2 ALFs for approximately $58.5 million throughout the U.S.
· $11 million mortgage loan with an existing operator. The loan bears interest at an initial annual interest rate of 9.5% with 2.25% annual escalators.
· $145 million of investments in our capital expenditure programs.
As of December 31, 2017, our portfolio of investments included 983 healthcare facilities located in 41 states and the U.K. and operated by 74 third-party operators. We use the term “operator” to refer to our tenants and mortgagors and their affiliates who manage and/or operate our properties. This portfolio was made up of:
· 775 SNFs, 119 ALFs, 15 specialty facilities and one medical office building;
· fixed rate mortgages on 47 SNFs and four ALFs; and
· 22 facilities closed or held for sale.
As of December 31, 2017, our investments in these facilities, net of impairments and reserves for uncollectible loans, totaled approximately $8.8 billion. In addition, we held other investments of approximately $276.3 million at December 31, 2017, consisting primarily of secured loans to third-party operators of our facilities and a $36.5 million investment in an unconsolidated joint venture.
Description of the Business
Investment Strategy. We maintain a portfolio of long-term healthcare facilities and mortgages on healthcare facilities located in the U.S. and the U.K. Our investments are generally geographically diverse and operated by a diverse group of established, middle-market healthcare operators that meet our standards for quality and experience of management and creditworthiness. Our criteria for evaluating potential investments includes but is not limited to:
· the quality and experience of management and the creditworthiness of the operator of the facility;
· the facility's historical and forecasted cash flow and its ability to meet operational needs, capital expenditure requirements and lease or debt service obligations;
· the construction quality, condition and design of the facility;
· the location of the facility;
· the tax, growth, regulatory and reimbursement environment of the applicable jurisdiction;
· the occupancy rate for the facility and demand for similar healthcare facilities in the same or nearby communities; and
· the payor mix of private, Medicare and Medicaid patients at the facility.
We seek to obtain (i) contractual rent escalations under long-term, non-cancelable, “triple-net” leases and (ii) fixed-rate mortgage loans. We typically obtain substantial liquidity deposits, covenants regarding minimum working capital and net worth, liens on accounts receivable and other operating assets, and various provisions for cross-default, cross-collateralization and corporate and or personal guarantees, when appropriate.
We prefer to invest in equity ownership of properties. Due to regulatory, tax or other considerations, we may pursue alternative investment structures. The following summarizes our primary investment structures. The average annualized yields described below reflect existing contractual arrangements. However, due to the nature of the long-term care industry, we cannot assure that the operators of our facilities will meet their payment obligations in full or when due. Therefore, the annualized yields as of December 31, 2017, set forth below, are not necessarily indicative of future yields, which may be lower.