Omega Healthcare Investors Inc (OHI) 2002 Q3 法說會逐字稿

Good morning. My name is Jonathan and I will be your conference facilitator today. At this time, I would like to welcome you to the Omega Healthcare third quarter conference call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star 1 on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you, Mr. Pickett, you may begin your conference.

Thank you. Thank you for joining our third quarter conference call. Comments made during this call that are not historical facts may be forward-looking statements such as statements regarding our business outlook and financial projections.

These 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 forward-looking statements.

With me today are Daniel Booth, our Chief Operating Officer, and Robert Stephenson, our Chief Financial Officer, who will provide operating and financial reports. Other members of the senior management team including Lee Crabill, Senior Vice President of Operations will participate in the question and answer session. I will review our FFO results, our capital structure issues, our releasing and restructuring activities, the liquidation of our other investments and our dividend policy.

First, FFO. Normalized FFO of 20 cents per fully diluted share tracks to our operating plan. As our interest in G&A costs decline, FFO will increase further. Normalized FFO provides an accurate view of the company by eliminating all of the financial results related to owned and operated assets, including losses and write offs. As we will review, we are almost completely done exiting these assets, which will eliminate cash losses and exit costs and noncash write-offs related to these assets. Included in our third quarter earnings is 16.3 million in nonrecurring expenses and revenue primarily related to owned and operated assets.

The following is a summary of the components of these nonrecurring items. Specific to our owned and operated portfolio, we recorded an account receivable reserve of $5 million, primarily related to the assets managed by Genesis and Kindred, all of which have been released, sold or closed.

We recorded a provision of $1.7 million related to our lease buyout of Alabama properties. We recorded $1.9 million related to professional liability insurance. And we recorded $3.8 million in reserves related to expense runoff from the 66 assets that we've owned and operated; this primarily includes expenses that were not recorded by our third party managers but have been incurred by the company as we've wound down the asset accounts receivable and payables.

If you total those numbers it's $12.4 million in charges related specifically to the owned and operated portfolio. The second major item in the nonrecurring expenses are charges specific to facilities that have been closed. We recorded a mortgage reserve of $5.2 million and we recorded a provision for impairment of $2.4 million totaling $7.6 million related to closed facilities.

Finally, we had the following nonrecurring revenue items. We had one-time revenue in the quarter for three operators of $1.5 million, and we had the gain related to our sale of our worldwide and principle assets of $2.2 million for total revenue items of $3.7 million.

So to recap the $16.3 million in nonrecurring expenses, 12.4 is related to our owned and operated portfolio, 7.6 or specific balance sheet write-offs related to closed facilities netted against 3.7 in one-time nonrecurring revenue items.

Second topic, capital structure. Our capital structure in October 31st, consists of bank debt of $182 million subordinated bonds of $100 million, Baltimore post office mortgage debt of $18 million, and other debt of $12 million. While further [INAUDIBLE] the balance sheet strengthens the corporate credit, our current goal is to find longer term financing that will allow us to reinstate dividends.

The company is actively exploring refinancing alternatives with the goal of extending the current debt maturity and having financial covenants to provide the greatest flexibility related to dividend payments. Under our current financing, and potential refinancing alternatives, we will be a variable rate borrower. In September, we eliminated most of the risk of future interest rate increases by purchasing an interest rate cap, which allows us to benefit the day's current low interest rate environment while capping our interest costs if rates rise above 3.5%.

The third topic is releasing and restructuring. Today, we're down to five facilities that we own and operate. Two facilities are likely to be released while the remaining three facilities are lease hold interests and will be terminated or subleased. The one major portfolio restructuring to be completed is IHS.

IHS and its non bankrupt affiliate, [Lyric], are making payments and continuing to work on a transaction that will be subject to bankruptcy court approval for ten IHS mortgage facilities. We've reached an agreement in principle for 10 [Lyric] lease facilities which includes effective today replacing it with Trans Health care Inc. as the new facility manager. Also, as Dan will review, we were able to complete a modest restructure of the [Alterra] portfolio in the quarter.

Fourth topic, managing our other investments. We sold the majority of our Omega Worldwide investment for $10.2 million in cash. We continue to hold a small investment in Australia. To date, we've collected $2 million of our $5 million Madison debt. Finally, as it relates to our two post office assets, we're working to sell our interest in these assets and hope to have an announceable transaction by the first quarter of next year.

Final topic, dividend policy. It's very unlikely that we will have taxable income in 2002, therefore, we expect that no dividend will be required in order to comply with the weak distribution rules. At December 31st, 2002, the accumulated deferred dividend will be approximately $40 million.

As I stated in the past, there are three issues we are looking to clarify before we reinstate our dividends. First, resolution of Medicare plus. Congress adjourned without acting on this issue. It is possible the cliff will be addressed during a lame duck November session. Second, restructuring the IHS portfolio. Based on discussions through today, it is possible this restructuring will be completed in the fourth quarter. And finally, refinancing our debt. The fleet revolving credit agreement expires December 31st of next year. In addition, our current bank covenants limited somewhat are voted to pay dividends.

We're working diligently to extend so that once our dividends are reinstated, we will not have debt maturities for future dividends. Bob Stephenson, our Chief Financial Officer, will now review our third quarter operating results.

Thanks, Taylor. Our operating results for the quarter and our balance sheet continue to reflect quarter to quarter improvement. As Taylor mentioned, normalized FFO was $11.2 million or 20 cents per share on a fully diluted basis for the quarter as compared to $6.7 million or 18 cents per fully diluted share in the third quarter of 2001. The 20 cents normalized FFO is also two cents higher per share than our second quarter normalized 2002 results.

Remember to normalize FFO, we exclude nursing home revenues and expenses, legal settlements and nonrecurring charges. Our reportable FFO on a fully diluted basis was a deficit of $5.1 million or deficit of 9 cents per share for the quarter as compared to $3.1 million or two cents per fully diluted share in the third 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 as a deficit of 21 cents per share for the quarter.

Revenue for the quarter, excluding our owned and operated assets and one-time revenue adjustments, was $22.6 million versus $21.7 million in the third quarter of 2001. The $900,000 increase resulted from a $1 million increase in rental income a $200,000 increase in mortgage income slightly offset by a decrease in $300,000 in miscellaneous income.

Turning to expenses. For the quarter, expenses excluding owned and operated assets, legal settlements and provisions for losses and impairments were 27% lower or $13.6 million versus $18.7 million for the same period one year ago. In addition, our expenses have decreased from $15.8 million in the first quarter of 2002 to $14.8 million in the second quarter to $13.6 million this quarter.

The $5 million favorable reduction versus the third quarter of 2001 was primarily a result of $1.2 million favorable G&A legal costs due to a reduction in corporate staffing. We actually had 11 fewer FTE's than one year ago as well as the continued reduction in consulting and legal costs associated with our owned and operated assets. We had 52 fewer owned and operated facilities versus the third quarter of 2001. In addition, we had $2.7 million of favorable interest savings and 1.1 million favorable noncash adjustments in depreciation.

Interest expense of $6.4 million for the quarter was $2.7 million less than the third quarter of 2001 due to approximately $132 million of reduced debt on our balance sheet. Additionally, we continue to benefit from the reduced LIBOR rates.

Turning to the balance sheet. Year-to-date, total assets decreased $67 million versus December 31st, 2001 primarily due to depreciation of $12.6 million, impairments and reserves of $18 million, cash collections and asset sales of $36.4 million. On a liability side of the balance sheet, debt year-to-date decreased $93.7 million from $413.2 million at December 31st, 2002, to $319.5 million at September 30th. This reduction was primarily due to the purchase and retirement of $97.5 million of June '02 bonds which occurred in the first and second quarter of this year.

At September 30th, 2002, we had $22.7 million of availability under our two revolving lines of credit. As of yesterday, our availability had increased to approximately $31.5 million. In addition, our debt to normalized EBITDA also improved to 3.9 one time in September 30th, 2002 to 3.88 times on September 30th, 2002.

Operating liabilities for owned properties decreased 6.2 million due to the reduction in 25 fewer owned and operated assets during the year. Stockholders' equity increased 49.6 million due primarily to the completion of the rights offering in private placement, which occurred in the first quarter of this year. Noted generated $44.6 million of net cash proceeds on 17.1 million of additional new shares.

We faced some additional issues, which could potentially result in additional noncash asset impairments, noncash provisions for uncollectible mortgages, notes and accounts receivable as well as gains and/or losses on asset sales. The events that could trigger these charges are, one, the outcome of restructured negotiations with IHS, two, the timing and net sales proceeds from 12 closed facilities with a total net book value of 6.8 million. These facilities are actively being marketed. Three, the timing and outcome of our releasing negotiations on the remaining five owned and operated facilities, and finally, our ability to collect owned and operated accounts receivable.

I will now turn the call over to Dan Booth, our Chief Operating Officer who will provide a general overview of the portfolio, the Medicare subissue and releasing transactions.

Thanks, Bob. As of September 30th, 2002, Omega had a core asset portfolio of 212 facilities. The majority, nearly 93% being skilled nursing homes. This portfolio is distributed among 30 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 80% of our investments and nearly 80% of our revenue stream. Occupancy as well as the portfolio as a whole has remained extremely stable over the last several quarters. Occupancy for our largest eight tenants and for the portfolio as a whole, was 84% and 82% respectively.

Coverage ratios were extremely consistent over the last two quarters, both with our large tenant pool and portfolio at large. Although we continue to witness moderate to poor operating fluctuations among individual tenants, our diverse portfolio of operators continues to be stable on an overall basis.

Trailing 12 months EBITDA coverage for the period ending 6/30/02 was 1.65 times versus 1.65 times for the same period -- I'm sorry, for the period ended March 31st '02. Likewise, EBITDA coverage was 1.22 times as of June 30th versus 1.32 times coverage as of March 31st. Unfortunately, the recent Medicare cliff effect on October 1, 2002 will have a negative impact on these coverages starting in the fourth quarter of this year.

By way of background, during the year 2000, Congress enacted various legislation which was intended to provide some relief to the extent of Medicare cutbacks resulting from the balanced budget act of 1997. The relief came in the form of four add-on payments. On September 30th, 2002, two of the add-ons, the 4% increase in all patient categories and the rug system and a 16.7% increase for nursing-related costs, expired. Partially offsetting the elimination of these add-ons, CMS provided a 2.6% market basket increase in payments to skilled nursing facilities.

Overall, the elimination of these two add-ons is expected to have an adverse effect on all of Omega's skilled nursing home operators and result in a decrease in operating performance to rent coverage. As of October 1st, 2002, the average net Medicare rate reduction across our entire portfolio equals approximately $25 per day.

Pro-forming again, these rate cuts with June 2002 actual performance, results in a reduction in the EBITDA dorm coverage from 1.65 times as previously discussed to 1.43 times. EBITDA coverage is reduced from 1.22 times to 1.0 times. While we believe the wide diversification of our portfolio coupled with the sustainable capital structure of most of our operators, will not result in a material interruption in revenue, we cannot predict the ultimate response to these Medicare cuts. We believe there remains some likelihood that these add-ons could be fully restated by Congress either by the lame duck session or when Congress reconvenes in January.

As far as owned and operated facilities, Omega ended the second quarter of 2002 with 13 remaining properties down from 33 year end 2001. During the third quarter, Omega released two facilities, one in Ohio and one in Indiana under a 10-year master lease. The initial annual base rent is $415,000.

In addition, Omega had three leasehold facilities in Alabama transferred to another operator. As a result of these activities, Omega ended the third quarter with eight owned and operated facilities.

Subsequent to the quarter end, on October 1st, 2002, Omega entered in a master lease to lease two facilities: A 60-bed facility and 75-bed facility both in Indiana to Kendallville Manor Investors and Cloverleaf of Knightsville Investors. The initial annual rent payment is $540,000.

Simultaneously, and in a related transaction, Omega subleased a 68-bed facility in Owensville, Indiana, to Owensville Manor Investors, an Indiana limited liability company. The initial term for the property shall be for the balance of the term on the ground lease, set to expire on February 28th, 2006 with an initial annual rent payment of $360,000. This compares to Omega's annual ground lease obligation of $518,000. However, if Omega is still the tenant under the ground lease after year one, then the annual rental payment under the Kendallsville and Knightsville annual lease increases per annum beginning in the second lease year.

As a result of the releasing efforts subsequent to the end of the third quarter, the total number of owned and operated assets decreased from eight as of December 30th to five as of today. Over the five remaining, Omega has two nonbinding term sheets which represent four of the five facilities. Omega is seeking to close upon each of these transactions by late in the fourth quarter or early in the first quarter.

Unrelated to our owned and operated assets, on October 1st, 2002, Omega entered into a master lease to release two facilities formally leased to [Alterra] Healthcare Corporation including a 36-bed facility and a 42-bed facility, in Jeffersonville, Indiana, to Residential Care VIII, an Indiana limited liability company. The initial term for the two properties is five years with an initial annual rent payment of $105,000, increasing to $345,000 in the second lease year. The net dollar impact of all these activities not already recognized in the third quarter is an additional $190,000 per quarter.

On the restructure front and as Taylor discussed, Omega continues discussions with IHS and its affiliate [Lyric] Health Care. For the record, Omega has mortgages on ten it facilities and a lease on one other facility. Separately, Omega has two master leases representing 10 facilities with [Lyric] Health Care. Effective November 1st, 2002, IHS was replaced as manager, of the Lyric facilities, with Trans Health Management Inc., a highly regarded long-term care provider based in Camp Hill, Pennsylvania.

In addition, Omega has negotiated a restructure of the [Lyric] relationship whereby the two master leases will be combined into one master lease at a revised contractual annual rent rate of $6 million. This amount coincides with what Omega has been collecting and recording as revenue during 2002. It is expected that the restructure of the[Lyric] leases will close on or before December 1st.

With regard to the IHS mortgages, it has been agreed after months of diligent negotiations, that Omega and IHS should part ways. As part of this arrangement, IHS will deed over the title to all ten mortgage properties. Accordingly, Omega is in the midst of three separate bidding processes where by we intend to release five facilities in Florida, two facilities in Georgia and one facility in Texas. Another facility in Texas is expected to be sold on December 1st for $2 million net to Omega. The tenth facility located in Florida has been closed by IHS and thus written off by Omega in this quarter. Omega expects any recovery from the sale of that facility to be very modest.

Lastly, Omega has one leased facility with IHS located in Seattle, Washington. That facility is expected to be released to Sun Health Care group beginning early 2003. Sun was chosen in part due to a significant presence and familiarity with the state of Washington.

Thank you, Dan. As a quick summary, first, our core earnings are on target. We've almost completely exited our owned and operated portfolio. Second, the Medicare cliff issue will tighten cash flow to right coverages. The ultimate effect to our owner/operators is not known. Third, the resolution of the IHS restructuring remains open but is progressing. Fourth, we've capped the LIBOR component of our interest rates at 3 1/2% for 64 months and continue to work on extending our debt maturities.

And finally, we continue to strengthen our balance sheet, our core cash flow revenue, and our overall credit with debt to normalized EBITDA of 3.88 times on October 31st. This concludes our prepared comments. We'll now take questions.

At this time, I would like to remind everyone, in order to ask a question, please press star 1 on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. And at this time, there are no questions.

Jonathan, why don't we wait one more minute and if we don't have any questions, we'll end the call.

Again, if you would like to ask a question, please press star and the number one on your telephone key pad. At this time, there are no questions, sir.

Okay, Jonathan. Thank you for joining our third quarter conference call. Bob Stephenson will be available for any questions that you may have.

This concludes today's conference call. You may now disconnect.