Omega Healthcare Investors Inc (OHI) 2003 Q4 法說會逐字稿

Good morning. My name is Crystal and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the Omega Healthcare fourth-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. (OPERATOR INSTRUCTIONS)

Thank you. Mr. Pickett, you may begin your conference.

Good morning and thank you for joining our fourth-quarter conference call.

Comments made during this 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 rent 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 and Exchange Commission, including without limitation our Form 10-K and Form 10-Q, which identify specific factors that could cause actual results or events to differ materially from those described in the forward-looking statements.

During the call today, we will refer to some non-GAAP financial measures, such as FFO and adjusted FFO, and revenue 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 Web site, at OmegaHealthcare.com.

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

Reported FFO for the fourth quarter is $11 million, or 20 cents per fully diluted share, and is in line with our operating plan. Funds Available for Distribution, or FAD, are 11.5 million, or 21 cents per fully diluted share.

Looking forward to this year, we are comfortable with the current consensus Street estimates for 2004 based off of our contractual increases on our investments and the run-rate of effect of our restructurings without giving effect to any potential acquisitions.

Turning to the Sun restructuring, as we jointly announced with Sun on January 26th, we have reached a nonbinding agreement with Sun to enter into a ten-year master lease through December 31, 2013. The annual rent for 2004 will be approximately 18.7 million. In addition, Sun will settle all other Omega base rent claims via the payment of deferred base rent of $7,761,000. The deferred base rent may be converted at any time into 800,000 shares of Sun stock. Based on Sun's current stock price of $12.35, the gross converted value is approximately $9.9 million.

Omega has five California facilities that remain to be transitioned out of the Sun portfolio, and we are optimistic that four the five facilities will be transitioned over the next few months.

As we've previously announced, common shareholders of record on February 2, 2004, will be paid a dividend of 17 cents per share on February 13, 2004. At 17 cents per share, our dividend payout ratio increases to approximately 85 percent of FFO and 81 percent of Funds Available for Distribution, which is in line with our peer group. We currently anticipate that 50 to 80 percent of the 2004 common dividend will be a return of capital. None of the 2004 preferred dividend is expected to be a return of capital.

Looking at growth opportunities, Omega has identified a number of senior care investment opportunities, primarily leveraging off of our many current operator relationships. As of today, we're not prepared to estimate our deal flow in 2004 but we believe that there are a significant number of acquisition opportunities. We have approximately $93 million of available capital to fund acquisitions at the present time.

Bob Stephenson, our Chief Financial Officer, will now review our fourth-quarter financial results.

Thank you, Taylor. As Taylor mentioned, our FFO, on a diluted basis, was $11 million, or 20 cents per share, for the quarter, as compared to 2 million, or 4 cents per diluted share, in the fourth quarter of 2002. Accounting conventions require us to report the lower basic or diluted per-share amounts. Therefore, in the press release, you will notice diluted FFO for the fourth quarter of 2002 shown as a deficit of 2 cents per share for the quarter.

We calculate FFO for management purposes based on the NAREIT definition and interpretive guidelines, which provide that impairment write-downs associated with previously depreciable operating property should be added back to GAAP net income to calculate FFO. Therefore, the 2 million of FFO in the fourth quarter of 2002 excludes the impact of 10.5 million non-cash impairment charges recorded in 2002. Further information regarding the calculation of FFO is included in our earning release and on our Web site.

Revenue for the quarter, excluding our owned and operated assets, was 20.8 million versus 23.9 million in the fourth quarter of 2002. The $3.1 million decrease resulted from $500,000 decrease in rental income, a $1.6 million decrease in mortgage interest income and a $1 million decrease in Other Income.

The change in rental income reflects the combination of an increase in rent resulting from contractual increases, offset by the run-rate effect of certain lease restructurings completed during 2003. The decrease in mortgage interest is the result of the (indiscernible) restructure completed in the first quarter of 2003, coupled with normal principal amortization.

The decrease in Other Income was primarily a result of the sale of the Baltimore Post Office that occurred in April of 2003.

Turning to expenses, for the quarter, our expenses were in line with the expenses of 12.7 million a year ago, after adjusting for the effect of eliminating owned and operated assets, the provision for losses and impairment and refinancing costs that occurred in 2002.

Interest expense of 5.4 million was for the quarter, which was a decrease of 200,000 from the fourth quarter of 2002 due to reduced debt on our balance sheet. We would note that our cash interest expense for the quarter was -- for the quarter -- excuse me -- was 4.8 million. That is for the year, excuse me.

Turning to the balance sheet, year-to-date, total assets decreased 79 million during December versus December of 2002, primarily due to the catch up and reinstatement of our preferred dividend, normal depreciation, asset sales, as well as 9 million of non-cash provision for impairments earlier in the year. At December 31, 2003, we had approximately 3 million of cash on our balance sheet, credit facility availability of 35 million and 50 million of availability on our new acquisition line. Today, we currently have approximately 93 million of combined and vested cash and availability.

On the liability side of the balance sheet, we had 281 million of debt at December 31, 2003. Omega has no debt maturities prior to June of 2007.

At December 31, 2003, Omega's total debt to EBITDA was 3.7 times and our fixed charge coverage ratio was 1.7 times. When adjusting for non-cash interest expense, our fixed charge coverage ratio was two times.

We would like to note that, during the quarter, S&P recently upgraded the company, consistent with Moody's earlier upgrade reflecting our strengthened capitalization and success in restructuring our portfolio.

Later today, there will be a Company profile slide presentation available on our Web site. I invite you to review our slide presentation and summary portfolio information.

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

Good morning. As of December 31, 2003, Omega had a core asset portfolio of 205 facilities distributed among 39 third-party operators located in 28 states.

Occupancy for the entire portfolio remained stable for the period ended 9-30-03 at 81 percent, for the preceding 12-month period, as well as for the third quarter.

Operator coverage ratios were also stable in the third quarter of 2003. Trailing 12-month EBITDARN (ph) coverage for the period ended 9-30-03 was 1.52 times versus 1.52 times for the period ended 6-30-03. EBITDAR coverage also remained constant at 1.07 times as of 9-30-03, versus 1.07 times as of 6-30-03.

(indiscernible) the October 1 Medicare rate adjustments, our combined operator revenue is expected to increase by approximately $14 million annually. This translates into an increase in our combined operator coverage ratios of approximately 0.17 times.

Turning to portfolio developments, the Sun negotiations, as Taylor mentioned earlier, have resulted in an agreement to enter into a new ten-year master lease involving 30 out of the former 50-some facilities. It is expected that the new master lease will be finalized and executed sometime in February. The initial annual contractual rent for the new 30 facility master lease is $18.7 million.

As part of the negotiations with Sun, Omega agreed some months ago to transition the other 20 facilities to third-party operators. As of today, Omega has released 15 of the 20 facilities in a series of seven separate transactions. The facilities are located in Florida, Texas, Louisiana, California, Illinois and Indiana. The initial combined annual rent for these 15 facilities is approximately $5.3 million.

To date, four of the remaining five facilities are under nonbinding term sheets with closing anticipated by the beginning of the second quarter with an expected annual rent of approximately 700,000 to $800,000. It is anticipated that when all the dust settles, Omega will be receiving just under $25 million in annual rent for the former 50 facility Sun portfolio, versus 2003 contractual rent of 26.3.

This slight revenue shortfall is mitigated by the $7.7 million of deferred base rent, which Taylor mentioned, and which may, at any time, be converted into 800,000 shares of Sun stock. We are very pleased with the outcome of these Sun negotiations.

Turning to Claremont, effective December 1, 2003, the Company sold one skilled nursing facility formerly leased by Claremont located in Illinois and representing 150 beds for $9 million. The Company received net proceeds of approximately $6 million in cash and a $3 million five-year 10.5 percent secured note for the balance.

This transaction results in a non-cash, non-FFO accounting loss of approximately $3.8 million, which was reported in the fourth quarter of 2003.

On November 7, 2003, the Company released two SNFs, formally leased by Claremont located in Ohio and representing 270 beds, to a new operator under our master lease, which has a ten-year term and an initial annual lease rent of $1.2 million.

Separately, the Company continues its ongoing restructuring discussions with Claremont (inaudible) remaining five facilities Claremont currently leases from the Company. At this time, the Company cannot determine the timing or outcome of these discussions. Claremont failed to pay base rent during the fourth quarter of 2003 in the amount of $1.5 million.

During the fourth quarter, the Company applied security deposits in the amount of $1 million to pay Claremont's rent payments and the Company is demanding that Claremont restore the $1.5 million security deposit. As of today, the Company has no additional security deposits with Claremont. The Company is recognizing revenue from Claremont on a cash basis as it is received.

Turning to future growth opportunities, as previously reported, Omega finalized a $50 million acquisition line with GE Healthcare Finance at the end of 2003. Since that time, Omega has been developing a pipeline of potential transactions, paying particular attention to the needs of our existing operator base.

Currently, the Company is reviewing approximate $70 million of new investment opportunities. However, it is premature at this time to begin handicapping how much, if any, of these transactions will ultimately close.

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

(OPERATOR INSTRUCTIONS). Your first question comes from Evan Stein (ph).

Hey, guys. A couple of questions -- first of all, with regards to Claremont, going to the next quarter, you will, on an apples-to-apples basis, I guess be the $1 million short in terms of revenue, because you don't have any other security deposits to apply to it. Could you give me a sense of sort of what you're thinking about that and -- you know, you have five facilities that I assume are eventually going to pay some sort of rent -- what you think you might eventually be able to release those for or how you view the loss of the million dollars, going forward?

Without impairing any of the current negotiations that Dan is in as it relates to the five facilities, you know, our view is those five facilities are likely to have annual rental approaching the $4 million we are talking about. Our only issue, from my perspective, is timing.

We are actively in the process, so I don't expect we are talking about timing that's a fourth-quarter event; I think it's going to be much sooner, but it's still a little bit early to give precise timing information.

In terms of economic value, we feel like $4 million of rent for those five properties is about where we are going to fall out.

Okay. Secondly, with regards to the preferreds, obviously, you're looking at acquisitions to -- maybe I'm answering my own question here -- but I saw that LTC has filed to sell some preferreds to refinance their existing preferreds. Obviously, that is implied at a lower rate. Would you guys look, at some point, doing a larger transaction, perhaps in conjunction with some of these acquisitions you're talking about, to lower your cost of borrowing in that area, now that the market seems to be a little bit more receptive?

I think you are right about the market being receptive. We are constantly looking at ways to strengthen our balance sheet and improve our capital structure. So, we have and will continue to look at opportunities to optimize our capital structure, going forward this year.

Okay. Then lastly, with regards to the acquisitions you were talking about, the 70 million, can you just describe maybe what criteria you are looking at in terms of what types of properties, what locations, whether it's (indiscernible) assisted living, whether it's new geographies or geographies you are already in? Then also speak to pricing for those types of properties.

Sure. I'm going to answer the question that Dan Booth probably would otherwise answer, because his voice is in rough shape.

Our strategy right now is to lever off of the 39 operator relationships that we have, plus other operator relationships that we may not have today but we have because we've been in the market so much with our restructuring.

Most of those operators are in a skilled nursing facility sector, although some do the skilled and assisted-living side. You know, we are really focused on senior care facilities in markets that we are currently in with operators that we currently have relationships, so we understand their performance, and have been able to monitor it for some period of time.

In terms of states, the focus for us is going to be primarily East Coast. It's not that geography because that's where we are located, but that's where the bulk of our facilities are located. We think, when you look at the East Coast reimbursement environment, that we will see a little more stability there than, you know, say, Indiana, Illinois, California and some of the West Coast states that are just a little bit more difficult. I don't think we would be doing much in those states.

Okay, thank you very much.

John Wallace (ph).

It's actually Jerry Doctrow. Taylor, I was just trying to understand, also on sort of the refinancing, which of the pieces of your debt structure and preferred structure are refinanceable now? Can you kind of run through those?

All of our debts, both the preferred and the A and the B, are callable today. Our senior unsecured is refinanceable today. The current GE revolver (indiscernible) is refinanceable, but there's a penalty.

Okay.

The prepayment penalty is $4.5 million, plus there's an interest rate calculation, so effectively, we could look at the entire capital structure.

Okay. Great, thanks. I think, actually, Evan actually asked the other questions I had, so I appreciate it. Thank you.

At this time, there are no further questions.

Okay. As Bob mentioned, we have a slide presentation that will be on the Web site that covers the latest portfolio statistics and some of the financial information that we went through today. If anyone has any questions, please feel free to call Bob, who will be available for the rest of the week and next week. Thank you.

This concludes today's Omega Healthcare fourth-quarter earnings release conference call. You may now disconnect.