Omega Healthcare Investors Inc (OHI) 2002 Q2 法說會逐字稿

Good morning. My name is Tamia, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Omega Healthcare Investors, Inc. second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there would be a question and answer period. If you would like to ask a question during this time simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pounds key. Thank you.

Mr. Picket, you may begin your conference.

Thank you. Good morning. Thank you for joining our second quarter conference call.

Statements made during this call that are not historical facts are forward-looking statements, such as statements regarding our business outlook and financial projections. They say forward-looking statements involve risks and uncertainties which may cause actual results to differ materially. Please see our press releases and filings with the Securities and Exchange Commission, including without limitation our Form 10-K and Form 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

With me today are Dan Booth, our Chief Operating Officer, and Bob Stevenson, our Chief Financial Officers and other members of the senior management team, including our senior vice president of operations who will participate in the question and answer session.

We're pleased with our earnings results for the quarter and the continuing execution of our operating plan. Quarterly highlights include the following: on the capital structure front, with the repayment of our June 2002 bonds, our capital structure at July 31st consists of bank debts of $205 million, subordinated bonds of $100 million, Baltimore post office marriage of $18 million and other debts of $12 million. Our releasing and restructuring efforts have been fruitful through the quarter and to date. Today we're down to eight facilities that we own and operate. Of these eight, five have non-binding term sheets that have been fully negotiated subject to do diligence by Omega and potential leasers or buyers. Of the remaining three facilities, two are likely to be released or sold, and one is very troubled and will be shut down or will require significant turn around effort. The one major portfolio restructuring to be completed is IHS. IHS in its non-bankrupt facility are making payments, and we're continuing to work on transactions that will be subject to bankruptcy court approval. We hope to reach a resolution with IHS and Lyric in the near future.

The third item I would like to highlight is management of our other investments. Our major other investments consist of Omega worldwide and related foreign investments, our post office investments, our Madison capital group investment and certain specific investments related to the core portfolio. Omega Worldwide recently announced a cash tender offer for all their outstanding shares. The tender offer closes on September 5th, 2002. The buyer can extend for 10 days. We are subject to certain confidentiality provisions, but I can say if the transaction closes we will recover our book value and may have a modest gain.

The Madison investment was the subject of a lawsuit in which we were both the plaintiff and defendant. That lawsuit was settled the day that it went to court. We expect a $5 million recovery paid out over time. As it relates to the post office assets, we're currently actively working to sell our interest in these assets.

The fourth highlight for the quarter is FFO. Our normalized funds from operations of 18 cents tracks to our operating plan, and we expect that as our interest in ga costs decline, our FFO will increase further. Bob Stevenson, our Chief Financial Officer, will now review our second quarter operating results.

Our operating results for the quarter and our balance sheet continue to reflect quarter to quarter improvements. Normalized SFO -- FFO was 10 million or 18 cents per share on a fully diluted bases for the quarter as compared to 17 cents per fully diluted share in the second quarter of 2001.

To formalize FFO, we exclude nursing home revenues and expenses, legality settlements and one-time provisions. The one-time items that occurred in the quarter are as follows: a 3.7 million provision primarily related to Madison, which Taylor talked about, and a 1.3 million loss associated with our owned and operated assets. Before taking into account the one-time items, our reportable FFO, on a fully diluted base its, was 5.1 million or 9 cents per share for the quarter as compared to a deficit of 37 cents per fully diluted share in the second quarter of 2001. Accounting conventions require us to report the lower of basic or fully diluted per share amounts. Therefore, in the press release we reported fully diluted FFO of 7 cents per share for the quarter.

Revenue for the quarter excluding our owned and operated assets was 22.2 million versus 21.9 million in the second quarter of 2001.. The $300,000 increase results from a $900,000 increase in rental income offset by a $300,000 decrease in mortgage interest income and a decrease of $300,000 in miscellaneous income. The $900,000 rental income increase was the result of a couple factors, a $2.1 million increase in revenues from new investments in 2001 and 2002 offset by 1.4 million in reduced revenues associated with restructurings, foreclosures and bankruptcies. We also had $200,000 of contractual increases. The $300,000 decrease in our mortgage interest income was primarily the result of a few mortgages being paid off during 2001 as well as normal amortization.

Turning to expenses, for the quarter expenses excluding owned and operated assets, legal settlements and provision for losses were 20% lower or 14.8 million versus 18.7 million for the same period one year ago. The 3.9 million favorable reduction was primarily a result of 1.4 favorable GNA and legal costs and $300,000 of non-cash adjustments for derivatives. GNA and legal expenses of 2.6 million for the quarter were 1.4 million lower than the second quarter of 2001 due to a reduction in corporate staffing. We currently have 12 fewer FTEs, as well as reduction in consulting and legal costs. There were 50 fewer facilities for this quarter versus last year.

Historically the company's GNA and legal expense has run approximately 2.5 million per quarter. Based on our continued focus and our expense control, reduced need for consulting and legal expense associated with our owned and operated portfolio, we are planning on returning to historic levels in the second half of this year. It's important to not we have now had two consecutive quarters less than 2.6 million of combined GNA and legal expenses. Interest expense of 7.1 million for the quarter was 2.1 million less than in the second quarter of 2001 due to approximately 87 million of reduced debts on our balance sheet. Additionally, we continue to benefit from reduced LIBOR rates.

Turning to the balance sheet, year to date total assets decreased 33.4 million SPR's December 31st, 2001 primarily due to removal of the investment and its related debt associated with our two HUD loans, approximately 5.2 million, 3.5 million reduction associated with the Madison investment, 2.5 million in impairments associated with the closure of three owned and operated facilities, 1.3 million associated with the sale of one asset held for sale in Texas, 7.2 million reduction in operating assets associated with our owned and operated portfolio, a decrease in net real estate of 8.5 million due to accumulated depreciation and a 2.4 million decrease in mortgage notes as a result of a mortgage payoff and normal amortization. On the liability side of the balance sheet, debt year to date decreased 75.3 million to 337.9 million versus 413.2 million at December 31st, 2001. This reduction was due to the purchase and retirement of 97.5 million of '02 bonds that were come due in June. 61.9 million were actually retired in the quarter. 5.2 million reduction associated with the removal of the HUD debt. These two were offset by a 13.6 million increase in net debt from the refinance of the Baltimore post office that occurred in the first quarter of this year and 14 million of credit facility borrowings.

In addition, operating liabilities for owned properties decreased 5.3 million due to having 20 four owned O & O facilities during the same time period. Stockholders equity for the six months increased 49.6 million primarily due to the company's of the offering and private placement which occurred in the first quarter of this year and generated approximately 44.6 million of net cash proceeds on 17.1 million additional new shares.

In the seconds half of 2002 we face what could potentially result in additional impairments, collection for mortgages, notes and accounts receivable. The events that could trigger these charges are the outcome of restructuring negotiations with IHS, the timing of net proceeds from 10 closed facilities we're actively marketing for sale and the timing and outcome of our releasing negotiations for the remaining eight owned and operated facilities.

I will now turn the call over to Dan Booth who will review the recent transactions and provide a general overview of our portfolio.

As of June 30th, 2002 Omega had a core asset portfolio of 217 facilities, the majority, nearly 97%, being skilled nursing homes. This portfolio is distributed amongst 32 third party operators and located within 28 states. The primary geographic concentrations are in the Midwest and southern states, nearly all of which are certificate of need states.

Although Omega has a diverse number of core operators, our largest eight tenants represent nearly 80% of our investments and nearly 80% of our revenue stream. Occupancy among these tenants as well as the portfolio as a whole has remained extremely stable over the last several quarters at 83 and 81% respectively. Coverage ratios have consistently improved both with our large tenant pool and the portfolio at large.

Although we continue to witness moderate quarterly operating fluctuations amongst individual tenants, our diverse portfolio of operators continue to improve on an overall basis. Trailing 12 months EBITDA coverage for the period ended 3/31/02 was 1.65 times versus 1.59 times for the period ended 12/31/01. Likewise, EBITDA coverage improved as of march 31st versus 1.18 times coverage at year ends. The difference is an implicit or implied 4% management fee. As far as owned and operated facilities, Omega ended the first quarter of 2002 with 19 remaining properties, down from 33 at year ends. Omega released three facilities in Colorado and had three other facilities close down, thereby ending the second quarter with 13 owned and operated facilities. The three facilities were closed due to continued poor operating results, physical plant problems and overall poor prospects. One of the three closures -- of the three closures, two were located in Massachusetts and one was located in Texas.

Subsequent to the quarter end, on August 1st, 2002, Omega entered into a master lease to lease two facilities, a 63-bed facility in Ohio and a 75-bed facility in Indiana, to hickory creek healthcare foundation, a Georgia not-for-profit corporation. The initial lease term for the two properties is 10 years with an initial annual rent payment of $415,000.

Additionally, on August 1st, 2002 the leasehold interest in three facilities in Alabama was terminated by the landlord and transferred to another operator. Omega paid a one-time fee of $100,000 in conjunction with the termination and release of three Alabama leaseholds. As a result of releasing efforts subsequent to the end of the second quarter, the total number of owned and operated assets decreased from 13 as of June 30th, 2002 to eight as of today. Of the remaining eight, Omega has three non-binding term sheets which represent five of these facilities. Omega is seeking to close upon each of these transactions by early in the fourth quarter. Of the remaining three owned and operated assets, Omega is in the process of diligently re-marketing those facilities for release.

On the restructure fronts, and as Taylor discussed, Omega continues discussions with IHS and Lyric healthcare. On the last call question indicated bankruptcy court approval would be sometime in the fourth quarter. This will not likely be the case as negotiations have ceased. .

For the record, Omega has mortgages on 10 IHS facilities and a lease on one other take silt. Separately Omega has two master leases representing 10 facilities with Lyric healthcare. IHS manages the 10 facilities and owns a 40% equity interest. Neither the Lyric entity nor the IHS facilities silt which manages it is in bankruptcy. Both IHS and Lyric continue to pay at approximately 70% of the contracted amount.

Despite the slow progress on that front, Omega feels very positive about its core asset portfolio. Our operators in general, and on the prospects for continued portfolio improvement. We expect portfolio improvements to come both from operational initiatives as well as several positive restructuring opportunities. Last but not least, Omega looks forward to getting out of the owned and operated business by the end of the fourth quarter.

Thanks, Dan. I would like to make a final comment regarding reinstating our preferred and common dividends.

In order to reinstate our common dividend, we will first need to catch up our accumulated preferred dividend. At September 30, 2002 the accumulated preferred dividends will be approximately $35 million. The Board of Directors has not made any decisions regarding a timing for dividends payments. Prior to reinstating dividends, we will need to consider the status of our refinancing initiatives versus currents bank covenants issues.

We will also need some clarity regarding the Medicare Cliff issue and the IHS and Lyric restructuring. The company will be addressing the use of cash and dividend payments prior to year ends. Our improved leverage statistics, our ability to put assets to work into the core portfolio and our liquidation of non-core assets dramatically improves the outlook of the company's cash flow and our future ability to reinstate dividends.

This concludes our prepared comments. We will now take questions.

At this time I would like to reminds everyone in order to ask a question please press star and the number 1 on your telephone keypad. We'll pause for just a moment to compose a Q & A roster. Your first question comes from Jerry Dotrow.

Can you hear me?

Yes.

I had a couple different things. I guess one of the things we're trying to sort out here is just south of on a run rate basis, I don't know if you can touch on this, we were given some of the transactions after the quarter, you know, what sort of rental mortgage and maybe the O & O stuff is going to look like kinds of going forward?

Well, I mean, we can go back through the various quarters. The events that took place -- excuse me -- in the second quarter, you know, we've been looking at this, the projected rental stream versus the annualized net income or loss of these facilities. And on the activity of the second quarter we have a pickup of just under $3 million annualized. And then for the two releases so far in the third quarter we have an annualized pickup of just under a half a million dollars.

And I think to finish the last part of your question, Jerry, we look at the remaining eight, the opportunity there is, what would you say, Dan, a million dollars at best?

Yeah, I'd say at best for future rental pickup.

Okay. And you talk about net, you're basically talking about the -- is that sort of a net after we lose operating -- is operating kind of a wash and we just pick up net rent?

For the most parts that's true.

Okay. One or two other things. Liability insurance obviously a big issue here for everybody since Beverly took this charge. I was curious as to what kind of claims experience you're seeing, whether there's, you know, risk there, I guess particularly for your O & O or other concerns for some of the other operators.

We can't speak to the other operators, but as far as our portfolio, our operators are covered from an insurance standpoint.

And we can talk a little bit about it. We've actually done an enormous amount of work, understanding the policies in place for each of our core operators and their assessment of risk. And you look at Sun Health, they have, you know, what we believe is more than adequate insurance. And you go through the portfolio, and that's our general sense. The tough place toss insure are still, obviously, Texas and Florida. And we have a portfolio in Texas that does not have a dramatic amount of insurance, which could pose a risk to that operator. But we have not been made aware of any claims that we have concern about.

Okay. And how about advocate? Can you just touch on what's going on with them at this point?

Jerry, at this point there really is nothing new going on at Advocate. I think they're talking to some of their other lenders in the background, but that's speculation only. We've had no conversations with them.

Okay.

Well, we've had updates with them as to whether anything's new. And I think their position continues to be they're going to run their business and they're going to look at the insurance issues that they obviously face. But there's no new news.

I will say just tracking it operationally, I mean, the facilities that we have leases on continue to do better on a quarterly basis.

All right. Great. Thanks.

At this time there are no further questions.

Very good. Well, thank you very much for participating in the call. If there are any further calls, Bob Stevenson, our CFO, will be available to take them. From a good day. Thank you.

Thank you for participating in the Omega, Inc. second quarter earnings conference call. You may now disconnect.