Omega Healthcare Investors Inc (OHI) 2003 Q3 法說會逐字稿

Good morning, my name is Mandy and I will be your conference operator today. At this time I would like to welcome everyone to the Omega HealthCare Q3 Investors Inc. Conference. 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 '*' then the number '1' on your telephone keypad, if you would like to withdraw your question press the '#' key.

I will now turn the call over to Taylor Pickett, Chief Executive Officer of Omega. Sir you may begin.

Thank you, good morning. Thank you for joining our Q3 conference call. Comments made during this conference call that are not historical facts, may be forward-looking statements, such as statements regarding our financial and FFO projections, dividend policy, portfolio restructurings and brand payment by certain operators, and 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 Exchange Commission, including without limitation our form 10K and form 10Q, which identify 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 and adjusted FFO, revenue and expense information excluding owned and operated assets. 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 non-GAAP measures are included in our press release, issued this morning. Or, in the case of per share information, available under the financial reports section of our website at www.omegahealthcare.com.

I will review Omega's Q3 FFO results, the status of the Sun restructuring, our common dividend and growth opportunities.

First FFO, reported FFO is $10.8m or $0.20 per fully diluted share and is in line with our operating plan. Omega currently anticipates $0.20 of FFO in Q4 of 2003. We expect to provide 2004 FFO guidance during or prior to our Q4 conference call.

Second, the Sun restructuring, we have continued our discussions with Sun, which called for cash payments of at least $1.51m per month, plus the transition of 20 facilities to Omega designated operators. 5 facilities were transitioned in July and 3 facilities were transitioned in October, leaving 12 facilities remaining to be transitioned. We have letters of intent on 11 of the 12 remaining facilities, and expect a number of the facilities to transition prior to year-end.

Omega is actively negotiating with Sun to reach a permanent restructuring. There can be no assurance that Sun will continue to pay rent at any level, although the Company is confident that if an agreement is not concluded [or sought], there are alternative operators available to lease or buy these facilities.

Third, our common dividend, as we have previously announced, the common dividend has been reinstated. Shareholders of record on October 31, 2003, will be paid a dividend of $0.15 per share on November 17, 2003. 100% of Q3 common dividend is expected to be a return of capital.

Fourth, the growth opportunities, Omega is investigating new investment opportunities and potential sources of capital. At this time we are not prepared to discuss specific 2004 acquisition goals or targets.

Finally, later in the call Dan Booth will discuss our lease restructuring with Claremont HealthCare Holdings, Inc. Omega remains confident in Trans-Health Management, the manager of these facilities. As I stated in our August 2 press release, Trans-Health stepped into an extremely difficult situation, when it took over operation of these facilities. Despite Claremont's default under it's lease obligations to the Company, Trans-Health is a quality operator and the Company remains committed to working with Trans-Health during the Claremont lease restructuring and transition of facilities.

Bob Stephenson our Chief Financial Officer will now review our Q3 financial results.

Thank you Taylor. As Taylor mentioned, our reported FFO on a fully diluted basis was $10.8m or $0.20 per share for the quarter, as compared to a deficit of $5.1m or a deficit of $0.21 per fully diluted share in Q3 2002. We calculate FFO for management purposes, based on NAREITs definition and interpretive guidelines, which provide that impairment breakdown associated with previously depreciable operating property should be added back to GAAP net income, to calculate FFO. Therefore the $10.8m of FFO excludes the impact of a $4.3m non-cash impairment charge.

If we exclude the next expenses associated with our owned and operated assets and the 2002 Q3 provision for uncollectable mortgage, notes and accounts receivable, then adjusted FFO is still $10.8m or $0.20 per share on a fully diluted basis for the quarter, as compared to $11.2m or $0.20 per fully diluted share in Q3 2002.

Revenue for the quarter, excluding our operated assets was $20.9m versus $24.1m in Q3 2002. The $3.2m decrease resulted from a $1.8m decrease in mortgage interest income and a $1.4m decrease in other investment income, primarily the result of the sale to Baltimore Post Office, which occurred in April 2003.

Turning to expenses, for the quarter expenses excluding owned and operated assets, provision for losses and impairments and adjustments for derivatives to the fair value, were 7% lower or $13m for the quarter, versus $14m for the same period one year ago. This $1m favorable reduction versus Q3 2002 was primarily a result of $100,000 of favorable G&A and legal costs and $900,000 of interest savings. Total interest expense for Q3 was $5.5m.

Turning to the balance sheet, total assets decreased $57.1m versus December 31, 2002. Primarily due to the catch-up and reinstatement of our preferred dividends, normal depreciation, as well as $9m of non-cash provision for impairment. At September 30, 2003, we had approximately $6.1m of cash on our balance sheet and credit facility availability of $22m. Today we currently have approximately $29m of combined invested cash and availability.

On the liability side of the balance sheet, we had $297m of debt as of September 30, 2003. Omega has no debt maturities prior to June 2007.

I'll now turn the call over to Dan Booth, our Chief Operating Officer.

Thanks Bob, good morning. As of September 30, 2003, Omega had a core asset portfolio of 207 facilities, distributed among 34 operators, located in 28 states.

Occupancy for the entire portfolio remained stable for the period ended 6.30.03 at 81%, and for the preceding 12-month period as well as for the quarter.

Operator coverage ratios were also stable in Q2 2003. Trailing 12-months EBITDA and coverage for the period ended 6.30.03, was 1.52 times versus 1.51 times for the period ended 3.31.03.

EBITDA coverage remained constant at 1.07 as of 6.30.03, versus 1.07 as of 3.31.03.

By pro forming the October 1 Medicare rate adjustments, our combined operator revenue is expected to increase by approximately $14m annually. This translates into an increase in our combined operator coverage ratios of approximately 0.17 times.

Turning to portfolio developments, the Sun portfolio as Taylor mentioned earlier, remains in the midst of a significant restructure. As of 6.30.03, Sun leased 50 facilities from Omega for an annual rent of approximately $26m. Plus -- I should say an annual contractual rents of approximately $26m.

Current discussions involve Omega transitioning 20 of the 50 facilities to new operators. As of July 1, 2003, Omega released 5 of those 20 facilities to 3 new operators. The facilities are located in Texas, Florida and Louisiana and have an annual contractual rent of $2.5m. Subsequently on October 1, 2003, Omega released 3 facilities in California to an unaffiliated third party for an annual rent of $1.25m.

Of the remaining 12 facilities that Omega expects to release, 11 are currently under non-binding term sheets, with 5 new operators. Expected annual rent from the new 11 leases should approximate $2.3m. At this time it is the intention of both parties to continue to lease the 30 remaining facilities. In the month of October Sun paid rent of $1.5m or $18.2m annually.

Turning to Claremont, on July 1, 2003, Claremont failed to pay its rent of $500,000. Subsequently Omega declared Claremont in default and drew down $500,000 on a letter of credit. To date Omega has drawn upon letters of credit or security deposits totaling $2m through October. Omega retains an additional $500,000 of security deposits, which it expects to draw upon for the November rent.

Omega is in ongoing discussions with Claremont concerning a restructure of the entire portfolio. As part of these discussions, Omega allowed one property in Hershey, Pennsylvania to be closed during Q3 2003. To date Omega has entered into negotiations concerning the transition of 3 Claremont facilities to third party operators.

Turning to Alterra, effective July 7, 2003, the US Bankruptcy Court in the District of Delaware approved and affirmed the amended Master Lease between Alterra and Omega. The amended Master Lease reduces the number of facilities from 8 to 5 with an annual rent requirement of approximately $1.5m. Omega is in the process of negotiating terms and conditions to release the remaining 3 properties. In the interim, Alterra will continue to operate these 3 facilities.

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 '*' then the number '1' on your telephone keypad. We will pause for just a moment to compile the q and a roster.

Your first question comes from Jerry Doctrow.

Hi guys, this is actually John Wallace calling on behalf of Jerry Doctrow.

I am just looking at aggregate workouts going forward and I was wondering if maybe you guys had a run rate? Right now we are currently running at about 125,000 for the quarter going through 2004, do you have any additional color on that?

When you say aggregate workout?

Just the total workouts for the Company, including Claremont, Alterra and all the other operators.

In 125,000 a quarter is - I am just trying to understand what you're - are you trying to pro former in the re-leasing of these workouts?

Yes, the re-leasing, correct.

Our FFO at $0.20 for Q3 and our projected $0.20 for Q4 we feel is a pretty good base line. If you ignore the workouts Dan talked about, the Sun restructuring where, we think that is going to fall out of the October releases of 3 Californian facilities at $1.25m. The 11 transition facilities that we are looking to get about $0.3m in rent, that is going to be in all likelihood offset to some extent by [indiscernible] Claremont restructuring. Although it is a little bit early to look at where that falls out.

Then Alterra, the 3 facilities that we're looking to re-lease present some upside. But that is why we talked about providing 2004 guidance [inaudible] [we] have prior to our Q4 call, because we will just have a lot better handle I think, our perspective is $0.20 is a good base line, and there some opportunities, but it is just too early to nail a number down.

Okay. I also have just one other question. Do you have a percent of revenue, are you kind of looking for another run rate of G&A and what are you kind of looking to do? We have about 7.5% in 2004, is that pretty accurate?

Our G&A including legal is - what does it run again now Bob? Yes, our G&A including legals run at about $8m. There may be some very modest opportunities to reduce that, but not anything significant, so I think you have effectively for the business that we run, portfolio manage, that G&A run rate, I wouldn't expect if we start to grow that the G&A would grow that much. I think we have some capacity within the staff today to take on a little bit more. We would have to have a fair amount of growth before we had to add substantial bodies.

Okay, all right, that was it, thanks guys.

Again, to ask a question please press '*' then the number '1' on your telephone keypad.

Your next question comes from Matt Zalt.

Can you go over once again what the return on capital is in terms of both the preferred and common dividend is and what we might be able to project going forward, as we look to identify and value the cash flows out into 2004?

Sure, I mentioned a Q3 common dividend, which the common dividend will be 100% return on capital for this year. The preferred, as we talked about last quarter, you know right today, we would look to the preferred return on capital to be in the 50% to 60% range, but it is still a highly volatile number. There is one reason, we have got a little over 2 months left this year and we have a number of potential sales transactions in process. Most of those sale transactions will result in taxable losses, which would increase the percentage for the preferred, however, there are two transactions, which might result in taxable gains, which would obviously decrease. So the volatility of that number is not core business, as much as it is these separate transactions, which I just can't predict '03 versus '04.

So similar to the last call, there is a wide range. I think I had talked about 30% or 100% in the last call, with the mid point sort of 60%. We continue to be there, subject to where these transactions fall out.

Then next year, '04, my expectation would be that our preferred dividend is going to be fully taxable, and a percentage of the common dividend will be return on capital. Without any transactions affecting taxable income again, primarily asset sales, I would look for something in the order of 20% to 40% of the common dividend [future gain] or return on capital. Obviously subject and highly volatile to transactions and dividend rates, et cetera.

Okay. Changing the subject a little bit, you mentioned earlier in the conference call that you suggested that the $0.20 [FFO] number that you were looking for in Q4 was a base line. As one approximates the owned and operated, the sales, the potential restructuring for the balance of the Sun portfolio and so on and so forth, given the fact that we were the last of the Sun operators to renegotiate with them and that there has clearly been an upturn in the prospects for both the Company and the industry in general. When you say base line, I know that some of it is also regarding like the sales you just talked to, you know, you can't tell exactly what is going to be held in the portfolio in 2004, but do I make the assumption that when you say base line, that of course the added [FFO] associated with the restructuring portfolio and so on, would be potentially add-ons to that base line by definition?

Yes. We looked at $0.20 as our current run-rate number with potential for upside from that number, but because of everything that Dan and I already talked about, we are just not in a position to give any real guidance beyond that. Beyond Q4 and then going into 2004 we look at that as a base line, as we solidify the final pieces of the Claremont and Sun restructuring, there might be more, there might not.

Then one final question, as far as the individual operators. We talked about Sun -- is Mariner continuing to be a good operator along the lines of our relationship?

The facilities within Mariner continue to perform very well for us.

Very good, thank you. Congratulations you guys.

There are no further questions at this time sir.

Okay, why don't we wait just - I know that in a prior call we had a little bit of problem with people getting through, we'll wait 30 seconds, if no-one else comes through then let me know.

So Mandy no more questions?

There are no further questions sir.

Thank you for joining our Q3 call, Bob Stephenson our CFO will be available for any follow-up questions that anyone may have.

Thank you for participating in today's conference. You may now disconnect.