The Driving Forces of Operator Performance: Past, Present & Future - MAY 2018 -
Forward-looking Statements and Non- GAAP Information This presentation may include projections and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to future events and expectations and involve unknown risks and uncertainties. Omega s actual results or actions may differ materially from those projected in the forward-looking statements. For a summary of the specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, see Omega s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. This presentation may contain certain non-gaap financial information including EBITDA, Adjusted EBITDA, Total Adjusted Debt (a/k/a, Funded Debt), Adjusted FFO, FAD, Total Cash Fixed Charges and certain related ratios. A reconciliation of these non-gaap disclosures is available in the Investor Presentation and Quarterly Supplemental, provided with this presentation, or on our website under Non-GAAP Financial Measures at www.omegahealthcare.com. Other financial information is also available on our website. This presentation includes certain statements, estimates and expectations based on management s subjective views and information provided by thirdparty consultants regarding potential future performance of operators and the industry. Such statements, estimates and expectations reflect various assumptions by the management of the Company concerning potential future operator performance, which assumptions may or may not prove to be correct. The model discussed herein has not been independently verified and cannot be regarded as constituting projections or a forecast of future performance of the Company. The model described herein was prepared expressly for illustrative purposes and is not a projection of future performance. Actual results may vary materially for a variety of reasons. Information is provided as of March 31, 2018, unless specifically stated otherwise. We assume no duty to update or supplement the information provided. The information contained herein does not purport to contain all of the information that a prospective investor may need or desire. interested parties should conduct their own investigation and analysis of the Company and the industry and the data set forth herein. 2
The Purpose of the Presentation Two Key Purposes of the Presentation To analyze the factors that have been driving operator performance in recent years. To evaluate these factors prospectively with the intention of estimating future operator performance. 3
A Challenging Operating Environment 2.5 TTM EBITDARM & EBITDAR Coverage 12/31/2005 to 12/31/2017, Quarterly 2.3 2.0 1.8 1.5 1.3 1.0 Operator EBITDAR coverage has been below 1.5x for over 4 years now. The decline is primarily due to 2 factors: OCCUPANCY REIMBURSEMENT v. COST GROWTH 4
The Focus is on Medicare Much of the focus of our analysis is on Medicare because: 1. Much of the change in operator performance has come from Medicare. 2. Medicare has a disproportional economic influence on SNFs. 2017 SNF Medicare PPD: $480 (1) 2017 SNF Medicaid PPD: $203 (1) 2017 SNF Expenses PPD: $215 (1) 3. Federally funded, aggregated information allows for better analysis. 4. Many of the factors influencing Medicare influence Medicaid as well. Many Medicaid patients are originally Medicare patients Demographics impact all payer groups (1) Based on OHI Core SNF Portfolio 5
Occupancy has Declined in the Past Decade 86.0% 85.0% 84.0% 83.0% 82.0% 81.0% 80.0% Industry Occ. % Industry occupancy declines have been driven by: 1. Migration from Medicare to Medicare Advantage 2. Reduction of discharges from hospitals 3. Unfavorable demographics 4. Decline in the length of stay Source: Industry data compiled by AHCA Research Department from CMS OSCAR/CASPER survey data (2009 2017) 6
Migration from Medicare to Medicare Advantage 36.00% 34.00% 32.00% 30.00% 28.00% 26.00% 24.00% 22.00% 20.00% MA Penetration There has been a steady migration from Medicare to Medicare Advantage in recent years. Given that the average SNF length of stay (LOS) for Medicare Advantage patients is 20.5 days, 12% fewer than Medicare patients, this migration has a negative impact on occupancy. Expectation going forward 1.0% continued annual migration from M to MA Source: CMS Medicare Advantage State / County Presentation 7
Thousands Performance Drivers: A Significant Reduction in Hospital Discharges 290.00 280.00 270.00 260.00 250.00 240.00 230.00 220.00 Since 2009, the number of discharges from hospitals per 1000 beneficiaries has declined 17%. 210.00 200.00 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 Number of STACH discharges / 1000 benes Total observation stays One significant factor is the increase in observation stays. From 2009 2016, annual STACH discharges declined by 974k. Over the same period, observation stays increased by 845k. Source: Medicare claims and enrollment, 2009-2016 8
Background on Observation Stays STACH Patient Inpatient Observation Status Covered under Medicare Part A Higher reimbursement rate Two midnight rule (from 2013) Increased risk of claim denial Penalties for readmission Covered under Medicare Parts B & D Lower reimbursement rate Should last <48 hours (higher in reality) Lower risk of claim denial Not appealable Discharge to SNF Discharge to SNF Part A pays 100% costs for first 20 days Part A pays 80% costs for next 80 days Board, room, nursing care out of pocket Therapy, drug & ancillary 80% covered from admission 9
Referrals to SNFs have Remained Steady 22.00% 20.00% 18.00% 16.00% 14.00% 12.00% 10.00% Discharges to SNF Referrals from hospitals to SNFs have increased marginally since 2009. Along with an increase in beneficiaries, this means the total discharges to SNFs have only decreased 4% from 2009 to 2016. Source: Medicare claims and enrollment, 2009-2016 10
Observation Stays Expectations Going Forward Expectations going forward The decline moderated from 2014. From 2014 2016, annualized decline of 0.9%. Based on conversations with operators and hospital administrators, we believe the impact has continued to moderate. Model an 80 bps decline in 2018, diminishing by 10 bps p.a. thereafter. 11
Births (000 s) Performance Drivers: Unfavorable Demographic Trends Everybody focuses on the baby boom but what about the baby bust? We know the majority of SNF utilization is between 75 and 87 years old. To get a proxy of the headwind, we track the average annual birthrate for 75 to 87 year olds in each calendar year. 4,500 4,000 3,500 3,000 2,500 2,000 1,500 U.S. Birthrates, 1909 to 1980 The actual Medicare enrollment did not experience such a dramatic decline due to other factors including younger baby boom enrollment, life expectancy increases etc. Medicare enrollment data only goes back to 2009 so this represents a good proxy for the headwinds. 3,000,000 2,900,000 2,800,000 2,700,000 2,600,000 2,500,000 2,400,000 2,300,000 Average annual US birthrate - 75-87 years old Source: Centers for Disease Control and Prevention 12
Demographic Expectations Expectation going forward Let s revisit that graph! Avalere has combined this demographic data with SNF utilization at each age group to reach a forecast growth rate for Medicare patients. Avalere s average 3% annual growth rate is materially in line with birth rates growth of core SNF age group. Medicaid patients tend to skew slightly older so we expect their growth to lag by about 3 years. 3,300,000 3,200,000 3,100,000 3,000,000 2,900,000 2,800,000 2,700,000 2,600,000 2,500,000 2,400,000 2,300,000 Average annual US birthrate 75-87 years old Average annual US birthrate - 75-87 years old SNF covered days based on Medicare Enrollees 3,000,000 2,900,000 2,800,000 2,700,000 2,600,000 2,500,000 2,400,000 2,300,000 2,200,000 (2016 Actual then Projected) Source: Centers for Disease Control and Prevention 13
Decline in Length of Stay Surprisingly, Medicare average length of stay (ALOS) has only declined 4% since 2009. Between 2014 and 2017, Medicare Advantage ALOS declined by 11%. The Medicare data is robust based on annual Medicare claim and enrollment data. Medicare Advantage data is less robust and is based on data from a basket of our operators. 26.00 24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 SNF Medicare ALOS (days) SNF Medicare SNF MA ALOS (days) SNF MA ALOS (1) Source: Medicare claim and enrollment, 2009 2016 (2) Source: Based on aggregated data from OHI operators for OHI facilities. 14
Length of Stay Expectations Going Forward Expectation going forward Medicare average length of stay declined by 0.75 days in 7 years, averaging a 0.1 day annual decline. Medicare Advantage average length of stay declined by 2.4 days in 3 years, averaging a 0.8 day annual decline. Notwithstanding the historical data, we believe the annual decline in Medicare ALOS will be closer to a 0.5 day annual decline. Equally, we believe the Medicare Advantage ALOS decline will moderate and will be closer to a 0.3 day annual decline. 15
Reimbursement v Cost Growth 2012 2013 2014 2015 2016 2017 CAGR Revenue PPD Summary Medicaid $ 190.49 $ 193.94 $ 193.02 $ 197.00 $ 199.59 $ 203.34 1.3% Medicare/Insurance/Hospice 431.28 448.52 465.94 474.11 476.50 480.38 2.2% Private/Other 177.39 183.57 188.57 192.86 200.58 206.32 3.1% Total Revenue PPD $ 242.12 $ 248.60 $ 250.46 $ 255.51 $ 257.97 $ 261.26 1.5% Growth 2.7% 0.8% 2.0% 1.0% 1.3% Expense PPD Summary Nursing $ 65.15 $ 66.62 $ 67.15 $ 69.07 $ 70.72 $ 72.70 2.2% Other Operating Expenses 132.06 136.58 137.98 138.85 139.74 142.07 1.5% Total Expense PPD $ 197.22 $ 203.20 $ 205.14 $ 207.91 $ 210.46 $ 214.77 1.7% Growth 3.0% 1.0% 1.4% 1.2% 2.0% Difference between Revenue and Expense Growth -0.4% -0.2% 0.7% -0.3% -0.8% -0.2% While less pervasive than the occupancy drivers, revenue growth per patient day has not kept up with equivalent cost growth in our core SNF portfolio. Some of this is due to the lower reimbursement from Medicare Advantage ($410 v $494). In the context of reduced occupancy and a low reimbursement growth environment, operators have demonstrated impressive control over costs. Source: Based on OHI Core SNF Portfolio 16
Reimbursement v Cost Growth Expectation going forward 2018 CMS SNF proposed rate increase looks reasonable at 1.8%. Labor costs are likely to remain elevated in the near-term. Assume cost growth exceeds reimbursement growth by 80 bps pa. Assume the current pricing difference between Medicare and MA remains steady. 17
Consolidated Model Assumptions 1% continued annual migration from M to MA 0.8% decline in census from observation stays in 2018, diminishing by 10 bps p.a. thereafter 3% average annual growth in census for M and MA based on Avalere assumptions 3 year lag on Avalere numbers for Medicaid 0.5 day annual decline in Medicare ALOS and 0.3 day annual decline in Medicare Advantage ALOS PPD cost growth exceeds PPD revenue growth by 80 bps pa Increase variable costs (~25% of total costs) to reflect increased census No cost reductions from new Patient Driven Payment Model (PDPM) No change in Q-mix derived from increased census 18
Summary of Model Results 2017 Total Beds 100 2025 100 Resident Breakdown (beds): Medicare 11.22 Medicare Advantage 7.22 Medicaid 63.74 Total 82.18 10.75 8.46 79.11 98.32 Revenue Breakdown: Medicare 26.4% Medicare Advantage 13.6% Medicaid 60.0% 21.9% 13.8% 64.4% PPD Breakdown: Medicare $500 Medicare Advantage $400 Medicaid $200 $559 $447 $224 Length of Stay (days): Medicare 23.3 Medicare Advantage 20.5 19.8 18.2 19
Summary of Model Results 2.20 2.10 2.00 1.90 1.80 1.70 1.60 1.50 1.40 1.30 2017 2018 2019 2020 2021 2022 2023 2024 2025 EBITDAR coverage (80 bps diff) EBITDAR coverage (20 bps diff) Applying documented assumptions, EBITDAR coverage increases from 1.34x at year-end 2017 to 1.74x at year-end 2025. Applying 20 bps revenue to cost shortfall, EBITDAR coverage increases to 2.17x by 2025. 20
Let s Temper Expectations Let s not forget 2 important factors: 1. The current operating environment remains challenging. Next 12-24 months are likely to remain challenging. Challenging is not the end of the world. 2. Trees don t grow to the sky. At some point, the reimbursement environment will be adjusted to reflect the improved operating environment. Again, this is not the end of the world. Average EBITDAR coverage in last 12 years is 1.54x. That is about a 5.4% EBITDA margin business not exactly extravagant. 21
Your Turn! Questions? 22