‘Pure Play’ No More: Omega Ups Its Senior Housing Game

When Omega Healthcare Investors (NYSE: OHI) announced that it would be acquiring Aviv REIT (NYSE: AVIV) in 2014, CEO Taylor Pickett described the combined company as the “premier pure-play skilled nursing REIT.” Today, skilled nursing still accounts for the vast majority of the REIT’s roughly 900 properties, but “pure play” may become a stretch as the company continues to invest in private pay senior housing in the United States and abroad.

Senior housing now makes up 10% of revenue for the Hunt Valley, Maryland-based REIT, and more growth could be in the cards, Omega executives said Wednesday while discussing second quarter earnings with analysts.

In addition to their senior housing plans, executives also touched on the headline-generating moves being made by one of the company’s key tenants, and delved into Omega’s strong quarterly results. The company posted adjusted funds from operations (FFO) of $173 million, or $0.87 per share. That beat analyst expectations of $0.83 a share.

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Senior Housing on the Horizon

In the second quarter, Omega completed $220 million of new investments, and senior housing accounted for $180 million of that.

In a $66 million acquisition, Omega acquired three assisted living/independent living communities in Texas, and in a $114 million acquisition, it acquired 10 care homes in the United Kingdom. Care homes are similar to U.S. assisted living facilities.

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By contrast, Omega paid $32 million for three skilled nursing facilities (SNFs) last quarter.

And this is not an isolated phenomenon; questions about Omega’s focus on senior housing have cropped up in the last year, driven not only by the REIT’s acquisition activity but its involvement in high-profile development projects such as an upscale community in Manhattan.

However, as in the past, Omega leaders on Wednesday were low-key about the increase in their senior housing investments. Growth in this area is due to one of the cornerstones of Omega’s business practices, they said—namely, building up relationships with its operating partners and growing together.

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“I think it really goes to something we’ve talked about in the past, and that’s supporting our tenant relationships,” Pickett said.

One such relationship involves Westport, Connecticut-based Maplewood Senior Living. Maplewood is set to operate the $246 million senior living residence being developed with Omega on Manhattan’s Upper East side. Maplewood is considering further development in New York City, and Omega also would be the capital partner in those endeavors, Maplewood CEO Greg Smith told Senior Housing News a year ago.

As to whether the Manhattan market can support not only this current project but additional ones as well—considering other recently announced developments—Pickett was unequivocal.

“Our current thinking is if you look at any sort of typical penetration rates of markets, that market could absorb well in excess of the three [developments] you are describing without putting a dent in it, and that’s before you get into the folks who will likely come in from outside that market to be with their children who live in Manhattan,” he said. “The utilization penetration rates are off the charts low, given the population density there.”

Another strong operating partner, this one in the United Kingdom, is Healthcare Homes. This company presented “the right operator relationship in a place with great demographics,” and has grown from 23 communities to 35 since partnering with Omega, Pickett said.

While the U.K. market is in turmoil following the country’s decision to exit the European Union, this is not deterring Omega from pursuing opportunities there. In fact, the REIT may be partnering with a second care home operator, as generally the company likes to have multiple operators in areas where it owns assets, Pickett said. And its U.K. operators likewise are not overly spooked by Brexit, he added.

All this activity prompted one analyst—Tayo Okusanya with Jefferies—to ask just how much revenue Omega ultimately might derive from senior housing in two or three years.

Without giving a precise number, Pickett said that the current 10% is “relatively low” and will most likely increase. However, that growth will mainly come through Maplewood and the handful of other operators already working with Omega, he said.

And, at least in the near-term, skilled nursing acquisitions may again eclipse private pay senior housing. Omega currently has a $400 million acquisition pipeline, and those transactions—anticipated to take place in 2016—are mostly skilled nursing, Pickett said.

Genesis Dispositions

As senior housing companies have released and discussed their earnings this week, it has become clear that post-acute care giant Genesis HealthCare (NYSE: GEN) is making some significant moves to right a troubled ship, and Omega is a player in this unfolding story.

While Genesis is expected to detail its plans more fully in its own quarterly earnings call on Friday, certain pieces already have emerged—including that the Kennett Square, Pennsylvania-based company recently entered into a new four-year $120 million term loan agreement with Omega and “Big 3” REIT Welltower Inc. (NYSE: HCN). Omega provided 40% and Welltower provided 60% of the loan.

The two REITs had plenty of incentive to work with Genesis, given that the skilled nursing and rehab company is a major tenant of both. As of June 30, 2016, Genesis was Omega’s second-largest tenant by revenue, with 57 facilities in 13 states.

Genesis should have more financial flexibility under this new term loan than it had under a previous loan administered by Barclays, Pickett told analysts.

“We just thought it was good, sound business,” he said.

In addition to gaining new financial flexibility, Genesis is looking to streamline its operations by exiting certain markets. It will do this in part by marketing for sale 29 communities that it leases with another REIT—Irvine, California-based Sabra Health Care REIT (Nasdaq: SBRA). In addition, Omega has agreed to consider either selling or transitioning seven of its Genesis assets to a new operator within about a year, Pickett said Wednesday.

Genesis and other major skilled nursing companies, including HCR ManorCare and Kindred Healthcare (NYSE: KND), have faced headwinds of late, including reimbursement and regulatory challenges. But Omega is among the companies that remains bullish on the skilled nursing sector in the long-term, suggesting its recent growth in the senior housing sphere is—as Okusanya said—more “coincidental” rather than a strategic hedge against skilled nursing risk.

Omega shares were up on Wednesday, opening at $34.54 and ending the trading day at $35.42.

Written by Tim Mullaney

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