Omega Beats, Ups Guidance

Omega Healthcare Investors, Inc. ( OHI - Snapshot Report ) , a real estate investment trust (REIT), reported second quarter 2012 adjusted FFO (funds from operations) of 53 cents per share, beating the Zacks Consensus Estimate by 2 cents. Moreover, this compares favorably with adjusted FFO of 47 cents in the year-earlier quarter.

Adjusted FFO came in at $55.7 million, compared to $48.4 million in the year-earlier quarter. The reported FFO was $55.8 million, or 53 cents per share, compared to $42.6 million or 42 cents per share in the year-earlier quarter.

Total operating revenue during the quarter was $83.8 million compared to $72.6 million in the year-earlier quarter but down by 2 cents from the Zacks Consensus Estimate of $84 million.

Quarter Highlights

Omega Healthcare’s net income increased to $30.6 million or 29 cents per share compared with net income of $17.8 million or 17 cents per share for the same period in 2011. The increase was driven by additional rental income and mortgage interest income related to new investments, gains on the assets divesture, decrease in real estate impairments and decrease in provision for uncollectible accounts receivable, partly offset by increased depreciation expense, interest expense and interest refinancing costs.

Operating expenses for the quarter totaled $32.3 million, which includes $27.2 million of depreciation and amortization expenses, $3.5 million of general and administrative expense, $1.5 million of stock-based compensation expense and $0.1 million of expense related to recently completed acquisitions.

Other income and expenses stood at $23.0 million, which includes $24.0 million in interest expenses and $0.7 million of amortized deferred financing costs.

Financing Activity

The company paid $11.8 million to retreat four mortgage loans during the quarter, bearing annual interest rate of 6.49% and having maturity period between October 2029 and September 2042, guaranteed by the Department of Housing and Urban Development (HUD). The payoff resulted in a $1.7 million of gain on the extinguishment of the debt, which included a $0.1 million prepayment penalty.

The company also entered into separate Equity Distribution Agreements, collectively called the 2012 Agreements, during the reported quarter. The 2012 Agreements were signed separately with BB&T Capital Markets, Credit Agricole Securities (USA) Inc., Deutsche Bank Securities Inc., Jefferies & Company, Inc., Merrill Lynch, a wealth management division of Bank of America Corp. ( BAC - Analyst Report ) and others to establish a $245 million Equity Shelf Program (ESP).

In the reported quarter, the company sold 510,000 shares under the 2010 ESP for net proceeds of approximately $10.8 million. Consequently, in the month of June, the company terminated its $140 million 2010 ESP.

Acquisitions and Dispositions

In the reported quarter, the company purchased four skilled nursing facilities (SNFs), totaling 383 beds and located in Indiana, for $21.7 million and leased them to Health and Hospital Corporation. The company also purchased one SNF totaling 80 beds and also located in Indiana, for approximately $3.4 million and leased it to Mark Ide Limited Liability Company.

The company sold three held-for-sale facilities for $7.9 million, generating a $2.0 million accounting gain.

Dividend

Concurrent with the earnings release, Omega Healthcare announced a common share dividend of 42 cents per share, to be paid on August 15 to common shareholders of record as of July 31. As of this date, the company will have outstanding common shares of approximately 108 million.

Liquidity

At the end of the second quarter, the company had cash and cash equivalents of $2.8 million. It had outstanding balance of $2.0 million under its unsecured revolving credit facility.

2012 Outlook

The company has revised its 2012 adjusted FFO guidance. Adjusted FFO is expected to be between $2.12 and $2.15 per share versus its previous range of $2.09 to $2.12 per share.

Omega Healthcare carries a Zacks #3 Rank, implying a short-term Hold rating. We also reiterate our long-term Neutral recommendation on the stock.

Note: FFO, a widely accepted and reported measure of the performance of REITs, is derived by adding depreciation, amortization and other non-cash expenses to net income.