Omega Healthcare Investors Inc (OHI) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Omega Healthcare Investors' Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

And at this time, I'd like to turn the conference call over to Ms. Michele Reber. Ma'am, please go ahead.

Good morning. With me today are Omega's CEO, Taylor Pickett; CFO, Bob Stephenson; COO, Dan Booth; and Chief Corporate Development Officer, Steven Insoft.

Comments made during this conference call that are not historical facts may be forward-looking statements, such as statements regarding our financial projections, dividend policy, portfolio restructuring, rent payments, financial condition or prospects of our operators, contemplated acquisitions, dispositions or transitions and our business and portfolio outlook generally.

These forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially. Please see our press releases and our filings with the Securities and Exchange Commission, including, without limitation, our most recent report on Form 10-K, which identifies specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

During the call today, we will refer to some non-GAAP financial measures, such as FFO, adjusted FFO, FAD and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under generally accepted accounting principles as well as an explanation of the usefulness of the non-GAAP measures are available under the Financial Information section of our website at www.omegahealthcare.com, and in the case of FFO and adjusted FFO, in our press release issued today.

I will now turn the call over to Taylor.

Thanks, Michele. Good morning, and thank you for joining our third quarter 2018 earnings conference call. Today, I will discuss our strategic asset repositioning and portfolio restructuring and our third quarter dividend.

We've made considerable progress toward completing our strategic asset repositioning and portfolio restructurings. In the first three quarters of 2018, we disposed of 71 facilities for a total consideration of $340 million. The revenue reduction related to these sales was $38 million, while the trailing 12-month cash flow on these assets was $26 million. The cash flow on these assets did not cover the underlying rent, yet we were able to achieve sale proceeds that equate to a cash flow yield of 7.6%.

We believe we're going to be able to redeploy these proceeds into higher-quality assets with good rate coverage, while experiencing minimal revenue impact. We will likely sell 10 to 15 additional facilities, but the bulk of our asset repositioning sales are now complete, excluding the ultimate outcome of the Orianna portfolio. 23 of the 42 Orianna facilities have been transitioned or sold. 22 facilities have been re-leased to 5 existing Omega operators, with related annual rent of $16.8 million. 1 facility in Tennessee was sold for $4.3 million.

There are 19 facilities remaining that will be sold or re-leased. We expect that these facilities will generate rent or rent equivalents in excess of $15 million, which is in line with our expectations and previous disclosures. With the bulk of our asset sales and repositioning behind us, we expect that in 2019, acquisitions will meaningfully outpace dispositions as we return to our historical growth model.

Turning to our third quarter dividend. Our third quarter dividend of $0.66 per share reflects a payout ratio of 85% of adjusted FFO and 96% of funds available for distribution. While these ratios are high from a historical perspective, we continue to feel comfortable with the payout ratio given that we incurred third quarter Orianna legal fees of $2 million in excess of our budget.

I will now turn the call over to Bob.

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $159 million or $0.76 per share for the quarter as compared to a loss of $47 million or a loss of $0.24 per share in the third quarter of 2017. Our adjusted FFO was $163 million or $0.77 per share for the quarter and excludes the impact of a $2 million recovery for uncollectable accounts, a $1.2 million mark-to-market loss on our Genesis warrants and $4 million of noncash stock-based compensation expense.

Operating revenue for the quarter was approximately $222 million versus $220 million for the third quarter of 2017. The increase was primarily a result of $8 million of incremental revenue from a combination of $445 million of new investments completed and capital renovations made to our facilities since the third quarter of 2017 as well as lease amendments made during that same time period, and $4 million of revenue related to the Orianna transferred assets that were transitioned to existing Omega operators in the third quarter of 2018.

Those 2 increases in revenue were partially offset by $8 million in reduced revenue, resulting from asset sales, transitions and loan payoffs that occurred since June of 2017. The $222 million of revenue for the quarter includes $18 million of noncash revenue. For revenue modeling purposes, we project our noncash quarterly revenue will continue at approximately $18 million. We expect to transition the Preferred Care portfolio and generate annual revenue between $5 million and $6 million, starting in late 2018 or early 2019.

We expect the Orianna facilities to generate annual rent and rent equivalents of $32 million to $38 million, when the restructuring is complete with over $4 million per quarter already completed related to the 22 legacy Orianna facilities that transitioned in Q3.

Our G&A expense was $10.3 million for the quarter, which was $2.6 million greater than our third quarter 2017 G&A expense. The increase was primarily due to legal expenses related to operator workouts and restructurings. For modeling purposes, we project our G&A for the fourth quarter of 2018 to be consistent with or slightly greater than our third quarter G&A, as a result of continued legal expenses related to operator workouts and transitions before returning to our traditional $8 million to $9 million of quarterly G&A run rate.

In addition, we expect our noncash stock-based compensation expense to be approximately $4 million per quarter for the fourth quarter of 2018 and throughout 2019, consistent with the first 3 quarters of 2018.

Interest expense for the quarter, when excluding noncash deferred financing cost, was $48 million or roughly the same as the third quarter of 2017, as lower debt balances were offset by a higher blended cost of debt, primarily as a result of higher LIBOR rates.

In the third quarter, we sold 7 assets for consideration of $26 million in net cash proceeds and a $5 million seller note, recognizing a loss of approximately $5 million. In the third quarter, we recorded approximately $300,000 in revenue related to these 7 dispositions.

During the quarter, we recorded a $2 million recovery in provision for uncollectible accounts related to $2 million in cash payments received from Orianna that was required as part of the bankruptcy plan and was applied to accounts receivable written-off in 2017. We also recorded approximately $23 million in real estate impairment charges to reduce the net book value on 8 facilities to their estimated fair values or expected selling prices.

Turning to the balance sheet. At September 30, we had 10 facilities valued at approximately $18 million classified as assets held-for-sale, and we're still evaluating approximately $60 million in potential asset disposition opportunities that could occur over the next several quarters. Our balance sheet remains strong. For the 3 months ended September 30, our net debt to adjusted annualized EBITDA was 5.42x and our fixed charge coverage ratio was 4x.

It's important to note, EBITDA and these calculations has only $17 million of annual revenue related to Orianna facilities and no revenue related to construction and process related to new builds. When adjusting for the likely range of expected rental outcome from Orianna, the known revenue on the new builds and removing revenue related to our third quarter asset sales, our pro forma leverage would be roughly 5x.

I'll now turn the call over to Dan Booth.

Thanks, Bob, and good morning, everyone. As of September 30, 2018, Omega had an operating asset portfolio of 917 facilities with approximately 92,000 operating beds. These facilities were spread across 67 third-party operators and located within 40 states and the United Kingdom.

Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio was up slightly during the second quarter of 2018 (sic) [third] quarter 2018 at 1.7 and 1.34x, respectively, versus 1.69 and 1.33x, respectively, for the trailing 12-month period ended March 31, 2018.

Turning to portfolio matters. In addition to the ongoing Orianna situation, which Taylor spoke about earlier, effective November 1, Omega transferred 9 former Preferred Care facilities, 5 in New Mexico and 4 in Arizona, to an existing Omega operator. Over the next several months, we expect to release 2 facilities in Oklahoma and sell 3 additional facilities in New Mexico, which will conclude our Preferred Care relationship.

Turning to new investments. On September 28, 2018, Omega entered into $131 million secured term loan with an unrelated third-party. The loan is secured by a collateral assignment of mortgages, covering 7 skilled nursing facilities, 3 independent living facilities and 1 assisted-living facility located in Pennsylvania and Virginia, with approximately 1,200 total operating beds. The loan bears an interest rate of 9.35% and matures on February 28, 2019, subject to a onetime 90-day extension. On or before the maturity, Omega expects to obtain fee simple title to the facilities and add them to the existing master lease with a current Omega operator.

During the third quarter, Omega also completed $44 million in capital expenditures. These transactions in aggregate bring Omega's year-to-date investment total through September 30 to $374 million, inclusive of capital expenditures.

Turning to Omega's repositioning activities. During the third quarter of 2018, Omega sold 7 facilities for approximately $31 million with an additional 8 facilities sold so far in the fourth quarter of 2018. This brings the year-to-date dispositions to 79 facilities, inclusive of 3 mortgage loan payoffs for total consideration of approximately $357 million.

In addition to facilities sales, Omega has re-leased 62 facilities year-to-date, which includes 22 facilities transferred from the Orianna portfolio, mentioned earlier by Taylor, and 11 facilities from the Preferred Care portfolio. We are currently evaluating approximately 20 additional facilities to sell or re-lease in the coming quarters. As always, Omega continues to review our portfolio and discuss strategic repositioning opportunities with each of our operators.

I will now turn the call over to Steven.

Thanks, Dan, and thanks to everyone on the line for joining today. In conjunction with Maplewood Senior Living, we continue to work on our ALF memory care high-rise at Second Avenue and 93rd Street in Manhattan. The project is expected to cost approximately $285 million including accrued rent and is scheduled to open in late 2019.

Including the land and CIP of our New York City project, at the end of the third quarter, Omega senior housing portfolio totaled $1.5 billion of investment in our balance sheet. Anchored by our growing relationship with Maplewood Senior Living and their best-in-class properties as well as health care homes and Gold Care in the U.K., our overall senior housing investment now comprises 124 assisted living, independent living and memory care assets in the U.S. and U.K.

On a stand-alone basis, the core portfolio not only covers its lease obligations at 1.2x, but also represents one of the largest senior housing portfolios amongst the publicly listed health care REITs. Our ability to successfully continue to grow this important component of our portfolio is highlighted by our 14 Maplewood facilities and the related pipeline is predicated on coupling our tenants' operating capabilities with our commitment to having in-house design and construction expertise.

Through this same capability, we invested $43.6 million in the third quarter in new construction and strategic reinvestment. $32.4 million of this investment is predominantly related to 13 active new construction projects with a total budget of approximately $500 million, inclusive of Manhattan. The remaining $11.2 million of this investment was related to our ongoing portfolio CapEx reinvestment program.

I will now turn the call over to Taylor for some final comments.

Thanks, Steven. While labor costs and occupancy rates will continue to pose near-term industry challenges, we remain confident that aging demographics and the new PDPM reimbursement system, commencing next year, will be very positive for the skilled nursing facility industry in the back half of 2019 and going into 2020.

This concludes our prepared comments. We will now open the call up for questions.

(Operator Instructions) Our first question today comes from Chad Vanacore from Stifel.

So I'm going to ask this in an odd way because you're in a good pace to be on the high-end of your guidance. So flip that around, what factors could or are being contemplated that might put you on the lower end of your guidance?

Chad, it's Bob. We have -- as you saw on what makes up the guidance on the one page, we have about $60 million of asset sales, so the timing of the asset sales has been, just mentioned some have already occurred. For modeling purpose, I always put them into middle of a quarter, so some of that has already happened sooner than I expected. Also, the LIBOR rates, 20% of our debt's variable based, so depending on what happens with LIBOR rates during the fourth quarter.

And we have a number of -- or a few operators who on a cash basis or timing of cash payment -- payments, and the last thing would be our G&A. I just said, we expect it to be right around with our third quarter, but as you know, the restructuring primarily around Orianna is still the -- the bankruptcy is still going on. So I can't really predict with the total accuracy what that number is going to be. So it's -- they are the components.

All right, that's helpful. And then just the one other thing, that $2 million legal fee -- or I'm sorry, the $2 million recovery of bad debt, where was that from?

That was -- Orianna was required to pay us $1 million a month. We received $2 million during the quarter. We applied it to outstanding or AR that was written-off in 2017.

(Operator Instructions) Our next question comes from Todd Stender from Wells Fargo.

Can we just hear more color on the loan you made, the $131 million for the portfolio? It sounds like it won't stick around very long if it converts to owned real estate, but just want to hear a little bit more about that.

Sure. You're exactly right. It's -- we expect it to be a short-term loan. It actually has the maturity of 6 months. So sometime in the first quarter, we expect it to flip from a loan to fee simple interest in the properties in Pennsylvania and Virginia. The structure was really a nuance that was requested, there was a combination to the seller. So do expect us...

For tax purposes, I imagine? For tax reasons, is that why you make the loan upfront like this?

I can't speak for the seller, to be honest.

No, that's fair, okay. Will it even cash flow? Will you collect any loan payments or this is kind of -- it'll just immediately roll into a lease and you'll just factor that into the initial lease yield?

No, we're actually -- we're absolutely getting monthly payments of interest based on the 9.375% rate.

Okay. And then just on dispositions, with the FAD payout ratio getting up around 100%, do you delay timing on asset sales at all? Or do you have sense of urgency to clean up the portfolio, and there may be a gap in cash flow to cover the dividend? How do you think about moving those asset sales quicker? Or do you hold on to them and spread them out?

Yes, from our perspective, Todd, we're going to -- we will be as aggressive as we can in terms of repositioning the portfolio. And as we've mentioned, the vast majority of that stock, we've got a handful of things, we'll clean up in Q4, and then, we won't really be talking about asset repositioning as a program going forward in 2019, it'll just be regular sales.

But from a timing perspective, we want to clean that up as fast as we can. And we know on a forward basis, we have lots of -- we still have assets on the sideline that improves that FAD coverage ratio. I noted in my comments that it's at 96%, which is actually a little bit better than Q2, and we think that will continue to improve going into '19.

(Operator Instructions) Our next question comes from Lukas Hartwich from Green Street Advisors.

On the $130 million loan, are there any additional costs when that converts to fee simple ownership?

No, there is not. We -- those documents are done.

Okay. And then the yield, once those convert, is that going to be in line with the interest rate?

Yes, it's the exact same.

Our next question comes from Daniel Bernstein from Capital One.

Seems to me like you're almost getting ready back to business of growing through acquisitions again. So maybe if we could talk a little bit about the pipeline that's out there, are you seeing any better opportunities on the SNF side whether that's lease coverages or yield and maybe the mix between what you're looking to go after in terms of senior housing versus SNFs?

Yes, so let me start by saying just so that we're clear on pipeline. When Omega talks about pipeline, we really talk about transactions that we feel are going to close. We've got something generally signed up. It's not as many people refer to pipeline, it's just what's coming across our desk. At any given time, we're seeing millions if not hundreds of millions, if not at times billions of transactions that are coming across our desk, we're seeing -- we feel most of everything that's about there.

As far as our pipeline goes, coming into the fourth quarter or end of the fourth quarter, once again, it's still not terribly robust. We're seeing a lot of stuff, but we're not trading a lot of stuff. It's really a combination of a bunch of factors. I mean, obviously we've been in little bit of reposition mode over the course of last 1.5 years. We've seen cap rates jump around quite a bit and we've sort of hoped and waited for those to settle in.

And then our operators, as you can imagine, have been repositioning themselves. So they're really paying attention to their existing portfolios and getting their house of cards in order. It seems to us as we look out at '19, this is more intuitive than anything. That people are starting to pay more attention to the deals that are out there I think, and we do believe that it will be a more acquisitive year in 2019 as some of our operators sort of get back in the game.

Coming out of NIC, we also heard that maybe private equity wasn't quite as aggressive in their underwriting for SNFs. Is that something you're seeing? And again, I'm just trying to gauge for you and for maybe other -- your peers, whether it's going to be a better investment opportunities set for '19 than it had been in '18, '17, the REIT's going to gain an advantage over private equity, that's really the question.

Yes, I think -- this is Taylor. In terms of yields, Dan, we're starting to see a little bit more stability in the 9s for SNFs and that be -- may be exactly what you said and private equity is a little bit less aggressive. On the senior housing side, I'm not sure that I can speak to that as definitively, although I would expect it's going to be similar.

Okay, okay. And then one last question, I'll hop off. In terms of -- I mean, it seems like your lease coverage is starting to stabilize. You did mention right there at the end of the call about some of the wage pressures that are out there. So I was trying to get a little bit better sense from you from what the operators are saying in terms of what they're seeing as headwinds, what they're seeing as opportunities, I guess, maybe pre-PDPM for '19? Just trying to get a sense of how you're thinking about the stability or risk to the lease coverage in the next 12 months?

I think coverages will be relatively stable, but I don't see them improving. I think the headwinds of labor and the ongoing battle around occupancy, which, I'll note that our operators have held occupancy fairly stable, but different geographies are different. Texas has been a particularly tough market in terms of occupancy for our portfolio and others. So I think we're going to see general stability as we continue to battle the headwinds, and we do have the benefit of a decent Medicare increase October 1, some decent Medicaid rate increases. So it's not all headwinds even in the next 12 months, but certainly, I don't expect coverages to come rebounding up into the [one fours] over the next 12 months. We think post-PDPM and the demographics really taking hold, we'll start to see some positive momentum in '20 for sure.

(Operator Instructions) Our next question comes from Karin Ford from MUFG Securities.

Wanted to ask a question on Orianna, just for modeling purposes more than anything else. Do have any more visibility on the timing of when you think the final set of properties will be resolved next year? And do you have a bias towards either the low or the high end of the range on your rent projection from Orianna?

So we had talked over the last few quarters of thinking that Orianna would be finalized this year, and that's not going to be the case. Bankruptcy, is its own beast. And you're right, it's going to be next year. Our view, it's probably Q1 of '19. And then, in terms of where we are in the range, we're still looking at the middle of the range as a pretty good estimate. So you got $3 million in either side of that. But I think in terms of modeling, I would take the middle of the range.

Okay, great. And then my second question is just on investments, if the pipeline does play out and you end up being a net buyer next year. Can you just talk about how you're viewing your sources of capital today? What do you find most attractive and your thoughts around equity issuance at this level?

We will certainly use equity to the extent that we find opportunities consistent with the past. I mean, we're going to maintain our leverage at 5 or below. Bob had mentioned on a pro forma basis, when you put Orianna back to work and put the assets, the biggest being Second Avenue to work, you'd get into that range. But we will continue to issue equity parallel to our investment activity.

The one comment I would make is to the extent that Orianna is resolved, we have cash proceeds coming back to us, that's obviously a source, which would be our first source, in terms of capital deployment.

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Thanks, Jamie. And thank you, everyone, for joining our call this morning. As always, the management team, in particular, Bob Stephenson and Matthew Gourmand will be available for any questions you may have. Have a great day.

And ladies and gentlemen, that concludes today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.