Omega Healthcare Investors Inc (OHI) 2003 Q2 法說會逐字稿

Good morning. My name is Mandy and I will be your conversation facilitator today. At this time I would like to welcome everyone to the Omega Health Care second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time similar simply press star then the number one on your telephone key pad. If you would like to withdraw your question press the pounds key. Thank you. Mr. Taylor Picket you may begin your conference.

Good morning and thank you for joining our second quarter conference call. Comments made during this conference call that are not historical facts may be forward-looking statements such as statements regarding our business outlook, dividend policy, debt position and financial projections. Each forward-looking statement involve risks and uncertainties that 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 Form 10(K) and Form 10(Q) 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 nonGAAP financial measures such as FFO and adjusted FFO, reconciliations of these nonGAAP measures to the most comparable measures under GAAP as well as an explanation of the usefulness of nonGAAP measures are included in our press release issued this morning and are available in the new releases section of our Web site at www.omegahealthcare.com.

I will review Omega's second quarter FFO results, the GECC financing, the status of the Sun restructuring and our dividend policy. First, FFO. Reported FFO is $8.5 million or 15 cents per fully diluted share and is in line with our operating plan. Included in our reported FFO is 2.6 million in expenses related to the write off of deferred financing costs from our prior bank revolver transactions. Excluding the deferred financing cost write off, FFO is 20 cents per fully diluted share.

Second, debt refinancing. We have today, we have debt today of $299 million consisting of bank debt of $187 million, bonds of $100 million and other debt of $11 million. Cash on hand is $52 million today. There is $25 million available for borrowing on the GECC revolving line of credit. We are extremely pleased that Omega was able to close the G.E. financing, extending our debt maturity through June, 2007, providing flexibility to catch up our preferred dividends arrearage.

Turning to the Sun restructuring. We have continued our discussions with Sun which now call for cash payments of at least $1.51 million per month plus the transition of 20 facilities to Omega designated operators. Five facilities were transitioned in July, leaving 15 facilities remaining to be transitioned. We currently do not have a signed agreement and, therefore, Sun is currently in default of our leases. Omega is actively negotiating with Sun to reach a temporary deal which may ultimately convert to a permanent restructuring but there can be no assurance that Sun will continue to pay rent at any level. However, the company is confident that given an agreement is not concluded with Sun there are alternative operators available to lease or by these facilities. Finally, our dividend policy. Preferred dividends at July 31, 2003, accumulated preferred dividend will be $55.1 million. As we have announced, Omega will fully catch up the cumulative preferred dividends from all three classes of preferred stock and Omega will recommence the regular quarterly preferred dividend.

Bob Stephenson, our Chief Financial Officer, will now review our second quarter financial results

Thanks, Taylor. As Taylor mentioned, our reported FFO on a fully diluted basis was 8.5 million or 15 cents per share for the quarter, as compared to 5 million, or 9 cents per fully diluted share in the second quarter of 2002. If we exclude the write-off of the deferred financing costs in the second quarter, the net expenses associated with our O&O assets and our 2002 second quarter provision for uncollective mortgages, notes and accounts receivable, then adjusted FFO is 11.2 million, or 20 cents per share on a fully diluted basis for the quarter, as compared to 9.9 million, or 18 cents per fully diluted share in the second quarter of 2002.

Revenue for the quarter, excluding our O&O assets, was 20.8 million, versus 22.2 million in the second quarter of 2002. The 1.4 million decrease results from a 1.7 million decrease in mortgage income, a $300,000 decrease in other investment income partially offset by a $.5m increase in rental income and a $100,000 increase in miscellaneous income.

Turning to expenses. For the quarter, expenses excluding O&O assets, provision for losses and impairments, adjustment from derivatives to fair value and the write off of the fleet and [Provident deferred]financing charges were 17% lower or 12.6 million for the second quarter versus 15.2 million for the same period one year ago. This 2.6 million favorable reduction versus the second quarter of 2002 was primarily a result of 300,000 of favorable G&A and legal costs resulting from the reduction of consulting and legal expenses associated with our O&O assets, and 2.4 million of interest savings. Interest expense excluding the 2.6m write-off of unamortized deferred costs associated with the old credit facilities was 4.8 million for the quarter, a decrease of 2.4 million for the second quarter of 2002 due to approximately 39 million of reduced debt on our BS.

Turning to the BS, YTD total assets decreased 6.3 million versus December 31, 2002, primarily due to normal depreciation as well as a first quarter 4.6 million non-cash provision for an impairment associated with one former Sun asset. At June 30, 2003, we had approximately 45.5 million of cash on our BS versus 15.2 million at year end. Today we currently have 52 million of invested cash and, as Taylor mentioned, 25 million availability under our revolving line of credit. On the liability side of the BS, we had 299 million of debt at June 30, 2003. Omega has no debt maturities prior to June, 2007.

I will now turn the call over to Dan Booth, our COO.

Thanks, Bob, and good morning. As usual I will go over the most recent operator statistics as well as recent portfolio developments. As of June 30, 2003, Omega had a core asset portfolio of 207 facilities, nearly all of which are skilled nursing homes. The portfolio is distributed among 33 third party operators located within 28 states. Occupancy for the entire portfolio fell off slightly in the period ended 3/31/03, dropping from 82% in December to 81% to the preceding twelve-month period as well as for the first quarter. Likewise, operator coverage ratios were also off slighting in the first quarter of 2003. Trailing twelve-month EBITDAR coverage for the period ended March 31 was 1.51 times versus 1.58 times for the period ended 12/31/02. EBITDAR coverage slipped to 1.07 as of March 31 versus 1.15 times as of December. The operators primarily responsible for this drop off in coverage are Sun and Claremont. The Sun portfolio, as Taylor mentioned earlier, is in the midst of a significant restructuring. As of March 31, Sun leased 50 facilities from Omega for an annual rent of approximately $26 million. Current discussions, although not yet formally documented, involve Omega transitioning 20 of the 50 facilities to new operators. As of July 1, 2003, Omega released five of those 20 facilities to three new operators. The facilities are located in Texas, Florida and Louisiana, and have an annual contractual rent of $2.5 million. Of the remaining 15 facilities that Omega expects to release, 13 are currently under nonbinding term sheets with five new operators. At this time it is the intention of both parties that the being Sun and Omega, to continue to lease the 30 facilities. In the month of July Sun paid rent of 1.51 million, or 18.2 million annually.

Coverage ratios and operating results for the 30 aforementioned facilities improved modestly in the first quarter of 2003. Conversely coverage ratios to the 20 transitional facilities dropped off noticeably, resulting in a drop in the overall coverage ratios of the Sun portfolio. Omega anticipates new operator enhancements will improve the results of these 20 facilities and hence improve the overall quality of Omega's core portfolio.

Turning now to Claremont. By way of background, effective January 1, 2003, Omega completed a restructured transaction with Claremont Healthcare Holdings, formerly Lyric Healthcare, whereby nine facilities formerly leased under two master leases were combined into one new 10-year Master Lease with an annual rent of $6 million. As part of the restructure Omega received security deposits totalling 2.5 million. In anticipation of this restructure, on November 1, 2002, Transhealth Management replaced Integrated Health Services as manager of these nine properties. Historical coverages were extremely tight under the restructured lease, anticipating future improvements in the facilities operating results. To date that has not occurred. On July 1, 2003, Claremont failed to pay its monthly rent of $500,000. Subsequently, Omega declared Claremont in default and drew down $500,000 on a letter of credit. To date, Omega retains an additional $2 million of security deposits in which the supplement rent, if necessary, on a go forward basis. It is likely that in the future some or even all the Claremont facilities will be transitioned to new third party operators.

Turning to Alterra. Effective July 7, 2003, U.S. Bankruptcy Court in the District of Delaware approved and affirmed an amended Master Lease between Alterra and Omega. The amended Master Lease reduces the number of facilities from eight to five with an annual rent requirement of approximately $1.5 million. Omega is in the process of negotiating terms and conditions to release the remaining three properties. In the interim, Alterra will continue to operate the three facilities. Despite the decline in operator coverages and the unfortunate need to further restructure the Claremont portfolio, Omega continues to be optimistic about its core portfolio. Continued diversification of the portfolio, operating improvements among many of our operators including recent releases and the prospect of a significant Medicare rate increase effective October 1 all add credence to this optimism

Thank you, Dan. This concludes our prepared comments. We will now take questions.

At this time I would like to remind everyone, in order to ask a question please press star then the number one on your telephone key pad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Jeff [Dubrow] with Trilogy Capital.

Good morning, you are doing very well. This is great to see. I did have a question for you. I wanted to get your viewpoint on what's doing with the Medicaid budget and specifically what's doing with the budget in California vis-a-vis reimbursement for nursing homes.

Your question came through -- I couldn't hear it.

I am sorry you are going to have to repeat it. It's muted off and on.

I'm sorry. Can you hear me better now? Okay. Actually, congratulations, you are doing very well and my question relates to your viewpoint on the Medicaid budgets at the various states, specifically California since they seem to have come to some kind of resolution yesterday.

As it relates to the overall Medicaid environment from a state perspective, three or four months ago I think everyone was somewhat pessimistic and the states have reacted for the most mart to protect Medicaid rates, although there is a cut in Texas and the proposal in California. Frankly you may have a piece of data that we don't have as it relates to California yesterday. What happened?

What they decided to do rather than having budget cuts in Medicaid was to go to a plan of service cuts, and they weren't specific in the release about what the service cuts were going to be.

Our general view in California is that there is no, it would be highly unlikely to see the 15% cut that the governor proposed because of the enormous stress it will put on the entire system. So our view has always been that in one form or the other a cut in the state will not be that dramatic. I guess we will see what this means as far as service provider cuts.

How many homes do you have in the state, California?

We have 11 skilled nursing facilities, two hospitals, one is a rehab hospital, one is a long-term care hospital, and five institute for mentally disabled.

All right. Thank you. Nice going.

Your next question comes from Kevin Cohen with Magnum Securities.

Hi, I'd like to know the tax classification of the preferred dividends that are going to be paid? I understand you can't be precise. I am just looking for a ballpark figure, maybe a 25% range, like 50 to 75% will be return of capital, something like that.

Let me not, I'm not a tax expert although I think I can give some background here and I will just, I will give you the facts that we have and the risks that we see in terms of nailing down a number. We will have tax earnings and profits for 2003. Obviously that calculation is for the balance of this year and whatever might happen for the balance of this year. If we look today at likely tax earnings and profits, the range looks to be 20 to 30 million. And we do not have any significant, I don't believe we have any, although we have to we have to finalize out of 2002 return to look at prior earnings and profits but I don't believe there is going to be any prior cumulative earnings and profits for prior years. So, in doing that calculation for this year, right now we are looking at likely tax [EMP] of 20 to $30 million for the year but it has to have a huge caveat around it that we have a number of months left to go before we complete our tax year. So I think you can add, you have to add some various potential on either side of that range and then, therefore, the first 20 to 30 and add a range around that of dividends paid, will be taxable for this year.

All right. So it sounds like at least 50% of it will be taxable?

It's just that the tax rate is very wide. We could have tax [EMP], I mean there are certain theoretical scenarios where it will be zero and that's going to have a lot to do with the timing of tax events, for example asset impairments where we weren't entitled to take the tax deductions in prior years you’ve got assets disposed of prior to the end of the year, it may release the loss into our tax return and it will be a loss for [EMP] purposes as well. So it's just a very, very highly volatile number and I think you can have a range of close to 100% that's return of capital and something that is as low as 30% and I hate to do that but we are right in the middle of that range and a $10 million swing either way is highly likely.

Okay. That's fine. Thanks for the help.

Okay.

Your next question comes from Matt Zot with First Capital Alliance.

Yes, good morning. Congratulations again. I have a similar type question, I guess to just narrow it down, you are suggesting maybe 60% is the mid-range of the return on capital that would be tax free to the preferred holders, being that 30 to 100 that you just alluded to. Is that correct?

I think that's, I think that's correct but I think the odds, that is sort of a bell curve, it could fall anywhere in that range, it's not more or less likely to be 30% or 99%.

Okay. Then going a step further trying to determine again the evaluation of these securities, obviously it's very attractive if it's a tax return on capital. Looking at your capital structure post August 1 when we, when we, when we are brought up to the current status on the preferred, if I am the CFO of Omega given my access to capital and so on and so forth, in the present interest rate environment is it a better use of capital to invest in new facilities to try to show some type of growth in our business to then add value to our stock price, or would it be a better use of capital to call these preferreds given the fact that there are still 8, 9% cost to us?

I think the nature of the preferred, well obviously it's a board decision as to growth strategy versus restructuring on the capital side that hasn't been specifically addressed. I think our view is those preferred are securities that we want to keep on our BS at least today. And that from a capital perspective that if you were making that choice you would probably look to put your capital to work in other places.

What would be, there aren't as many players out the there these days providing finance in the healthcare sector, long-term care, what are the returns you think you might see if you could pick and choose to pull your cash flow and your free credit into facilities that would allow you to expand your business?

I think, and we haven't contemplated that and a go forward basis in terms of growth and where we target opportunities, we think that 11% return is fair in this market today.

And further cost of capital, what's our blended cost of capital these days?

On the debt side, you are looking at less than 7%. On the equity side we sort of need to see where our, where the preferred and the common land in the next few weeks so we can probably give you a better sense of that, but it's north of 11% right now.

Very good. Okay. Well, congratulations. It looks like the turnaround is well on its way.

Again, at this time I would like to remind everyone if you would like to ask a question at this time please press star then the number one on your telephone key pad. Your next question comes from Evan Steen with EOS.

Hi, guys, congratulations. A couple of detailed questions and a strategic question. When you refer to the agreed rent, the 1.511 per month that Sun is paying, I'm a little bit confused, on the 15 other facilities, is there potential, is that exclusive of rents on those 15 facilities? In other words if you go out and lease those 15 facilities and you have 13 under contract do we expect an additional rent stream coming in on top of those from on top of everything you've told us?

Yes.

Okay. Then in regard to the comments about dividends on the common, what is your desire, you are still very by the way I calculate it your seven times leverage to the preferred of the senior level left, the free cash flow that you'll generate, you want to give us any idea what type of leverage metrics you want to operate under and what pay out ratio out of the free cash ratio you are looking at? You can make the dividends any sorts of ways you can pay out 80% like lots of these other guys but that would not provide you with very much free cash flow to pay down debt and it would take you an extremely long time and on the other hand you could (Inaudible) lower payout ration and pay down more of the debt and maybe take some of the debt instead of paying it down, reinvest it? I am trying to get the metrics when you make a comment about a dividend payment, I guess what kind of capital structure and leverage ratios you are comfortable with.

The ultimate decision that we've made is at the next board meeting and every other board meeting we will sit down and work through what our policy is going to be both in terms of timing and amount. But the only couple of comments I would add to your question about leverage, we are a little bit unique because we have such a huge amount of preferred capital in our structure relative to debt. So there is going to be a big focus on the amount of debt and the leverage statistics at that level and to some extent we don't necessarily view the preferred as debt per se because it doesn't have the same risk that debt brings. So our focus is going to be leverage at the debt level and a then snapshot of all the free cash flow foul all the both preferreds and common. All that being said, I don't think if we were to initiate a common dividend that you are going to have incredibly meaningful amounts of free cash flow to pay down debt out of the quarterly cash flow. So I am not sure that is as big a concern as just what's appropriate for our shareholders in terms of what we can afford. It's a long way of saying in a sense that our refinancing of the debt side of our account restructure is not likely to come out of free cash flow.

So you are implying that would come out of what, either asset sales or you would go out and do capital raises?

Yeah, asset sales or capital raises and we've now put ourselves in a position that we have a four-year window to look forward as the next few months will shake out the rest of the (inaudible) portfolio issues which have been there, down to just a small handful and we will get opportunities.

Okay. Then just a last question on Claremont, two things. You said that when you started off the coverages expecting improvement they didn't improve they are having trouble, they didn't pay the rent. And you also said they are likely to be released to other operators. Can you just clarify, I would have thought that maybe if they were tightened improvement didn't take place that what you would do is sit there with the same operator and just renegotiate a lower rent and sort of move forward, but maybe what's implied in the commentary is that you don't think that they are being operated as efficiently or as well as they could and they would probably be better off in the hands of somebody else.

I think everything you said was accurate.

Okay. Congratulations again.

Thank you.

At this time, sir, there are no further questions.

Great. Well, thank you for joining our first quarter, our second quarter call. As usual Bob Stephenson, our CFO, will be available for any follow up questions that you may have.

Thank you for participating in today's Omega Health Care second quarter earnings release conference call. You may now disconnect.