In re Omega Healthcare Investors, Inc.

375 F.Supp.3d 496

IN RE OMEGA HEALTHCARE INVESTORS, INC. SECURITIES LITIGATION

This Document Relates to: All Actions

17 Civ. 8983 (NRB)

United States District Court, S.D. New York.

Signed March 25, 2019

MEMORANDUM AND ORDER

NAOMI REICE BUCHWALD, UNITED STATES DISTRICT JUDGE

Lead plaintiff Royce Setzer brings this class action under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 against Omega Healthcare Investors, Inc. ("Omega") and the company's chief executives ("individual defendants," and, together with Omega, "defendants"), on behalf of a putative class of investors who purchased or otherwise acquired Omega's securities between May 3, 2017 and October 31, 2017, both dates inclusive ("class period"). Specifically, plaintiffs bring claims under: (1) § 10(b) of the Exchange Act and Rule 10b-5 against all defendants; and (2) § 20(a) of the Exchange Act against the individual defendants. Defendants have moved to dismiss the Consolidated Amended Class Action Complaint ("Amended Complaint" or "AC") under Federal Rule of Civil Procedure 12(b)(6) and the Private Securities Litigation Reform Act ("PSLRA") for failure to state a claim. For the following reasons, defendants' motion to dismiss is granted.

BACKGROUND ¹

I. Parties

Omega, a publically traded Maryland corporation, AC ¶ 15, is a self-administered real estate investment trust ("REIT") that invests in healthcare facilities, such as skilled nursing facilities and assisted living facilities, id. ¶ 2. Omega provides lease or mortgage financing to these healthcare facilities and earns money for its stockholders largely by collecting rent and/or mortgage payments from the operators of the facilities. Id. ¶ 2. At all relevant times, defendant C. Taylor Pickett ("Pickett") served as Omega's chief executive officer ("CEO"), id. ¶ 16; defendant Robert O. Stephenson ("Stephenson") as the chief financial officer ("CFO"), id. ¶ 19; and defendant Daniel J. Booth ("Booth") as the chief operating officer ("COO"), id. ¶ 22. Plaintiffs are individuals who purchased or otherwise acquired Omega's securities during the class period. Id. ¶ 1.

II. Omega's First Quarter 2017 Communications and Activities

Non-party Orianna Health Systems ("Orianna")² was Omega's second largest operator as of December 31, 2016. Id. ¶ 4. In 2016 and 2017, Orianna faced operational pressures due to a variety of factors. Id. Because of these pressures, Orianna failed to pay rent to Omega during the first quarter of 2017, reaching 45 days past-due by the end of the quarter. On May 2, after the end of the first quarter but prior to the earnings press release and conference call for that quarter, Omega provided an $ 18.8 million working capital loan to Orianna. Id. ¶ 36. The loan was not publicly disclosed. Id. The next day, May 3, Omega issued a press release that included annual adjusted funds from operations ("FFO") estimates of $ 3.40 to $ 3.44 per diluted share. Id. ¶ 40. On May 4, Omega held a conference call to discuss earnings and address portfolio issues of increased labor costs and decreased lengths of stay in Omega-owned properties. Id. ¶¶ 34-35. On that call, defendant Booth stated that "[o]ne private top 10 operator, of note, however, felt the performance pressure more than most." Id. And that "[t]his was exacerbated in 2016 by complete replacement of senior management early in the year." Id. ¶ 35. Omega also disclosed that the operator had dipped below 1x EBITDAR³ for the trailing 12 months. Id. The complaint alleges that this operator was Orianna. Id. ¶ 35. Booth further disclosed: "Omega embarked on an effort to sell off the company's northwest region, which consisted of 7 facilities.... We anticipate the sale of all 7 facilities in that region to be completed by the second quarter of 2017, with 3 facilities having already been sold." Id. ¶¶ 34-35. In response to an analyst who questioned why Omega's guidance did not reflect that the tenant [i.e., Orianna] was no longer paying rent, defendant Pickett stated "... at 45 days past due, to start fiddling around with guidance, just doesn't make any sense, we feel pretty comfortable that they're going to come back with coverages at their previous level ...." Id. ¶ 44.

Following the earnings call, on May 5, Omega filed a 10-Q report for the quarter ended on March 31, 2017, which disclosed that it had executed sales agreements to sell Orianna's seven northwest facilities to new operators. Id. ¶ 33. The 10-Q further stated "[t]here have been no material changes to our risk factors as previously disclosed ... in Part 1 of our Annual Report on Form 10-K⁴ for the fiscal year ended December 31, 2016." Id. ¶ 51.

III. Omega's Second Quarter 2017 Communications and Activities

Orianna reached 90 days past-due on rent during the second quarter of 2017. At the end of the quarter, on July 26, 2017, Omega issued a press release that revised Omega's 2017 guidance on FFO upwards to between $ 3.42 and $ 3.44 per common share. Id. ¶ 59. The day after the press release, Omega held a conference call to discuss earnings. Id. ¶ 61. Omega stock fell 4% by the close of the day of the conference call. Id. ¶ 63. On that call, defendant Booth said:

While we're cautiously optimistic that portfolio-wide coverages have stabilized, we continue to see certain regional operators struggle with various operational pressures ... The first of these private operators, and one which we discussed on our last earnings call, has continued to experience [quarterly pressures], despite finally showing signs of operational improvements.... We are consciously (sic) optimistic that the combination of these efforts will result in steadily improving margins and eventually return to its former profitability. However ... our past due rent has reached nearly ninety days in arrears. As such, any further deterioration and/or the failure of the tenant to achieve its budgeted plan may result in cash basis accounting and a potential review of the value of these capital lease assets.

Id.

On August 9, 2017, Omega filed its 10-Q for the quarter ending June 30, 2017. Id. ¶ 64. The 10-Q made the following statement regarding Orianna⁵ :

One of these operators has been facing liquidity pressures following a management transition, but has been showing signs of operational improvement and is making partial monthly rent payments. The current management of this operator is pursuing operational improvements, such as replacing executive management and senior level management, renegotiating vendor contracts and establishing a centralized referral network. The Company expects to sell two other facilities and transition its existing Texas portfolio to another operator during the third quarter of 2017. The Company is optimistic that the combination of these efforts will result in improving margins and performance by this operator. The company is currently recording rental revenue from this provider on an accrual basis. The company continues to monitor the operator's operating plan and in the event its performance deteriorates, the company will reassess the carrying value of the portfolio and consider recording future rental revenue on a cash basis.

Id.

IV. Omega's Third Quarter 2017 Communications & Activities

Orianna's continued failure to pay rent resulted in Omega placing them on a cash basis for revenue recognition during the third quarter of 2017. On October 30, 2017, Omega issued a press release, in which defendant Stephenson stated:

During our second quarter earnings call, we stated we were closely monitoring one of our operators and may have to place them on a cash basis for revenue recognition if their performance did not improve. Since Orianna did not achieve their revised operating plan and pay their full contractual rent, we placed them on a cash basis and therefore our third quarter results, including AFFO ["Adjusted Funds From Operation"] and FAD ["Funds Available For Distribution"], do not include any revenue related to Oriana.... Since 93% of our Orianna portfolio was classified as a direct financing lease, placing them on a cash basis and initiating the process to transition some or all of their portfolio to new operators also required us to record several large provisions related to the direct financing leases during the quarter.... We are lowering our 2017 guidance to reflect the temporary loss of third and fourth quarter 2017 revenue primarily related to placing Orianna ... on a cash basis.

Id. ¶ 68.

Also on October 30, 2017, in response to the press release, Jeffries analyst Omotayo Okusanya wrote:

Orianna ... did not achieve their revised operating plan and pay its full contractual rent.... The disparity between reported AFFO/sh and our estimates is attributable to the nearly $ 12M a quarter in rents the company is not recording from Orianna ... While the tenant issues in the [Omega] portfolio were made evident to investors in 2Q17, the magnitude of the impairment from Orianna, the lowered full year guidance, and continued concerns about tenant credit risk will likely weigh heavily on the stock market.

Id. ¶ 72.

On October 31, 2017, Omega held a conference call to discuss its third quarter results. Id. ¶ 69. Subsequent to the October 31 conference call, Omega stock fell 6.8%. Id. ¶ 70. On the call, defendant Pickett stated "[t]he reduction in adjusted FFO and FAD is primarily related to converting the Orianna portfolio to cash basis accounting ...." Id. Defendant Stephenson stated, "[w]e have lowered our 2017 adjusted FFO guidance to $ 3.27 to $ 3.28 per share. The reduction is primarily a result of two items: first, it reflects the temporary loss of Orianna revenue for both the third and fourth quarters ...." Id. Defendant Booth stated "Orianna ... has fallen significantly behind on rent and as a result has been placed on a cash basis accounting ... While we have endeavored to assist Orianna in streamlining operations by transitioning both their Northwest and Texas regions, the overall...