Omega Healthcare Investors Inc (OHI) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Omega Healthcare Investors Q2 earnings conference call. My name is Bernie, and I will be your coordinator today. At this time, all participants are in a listen-only mode and we will be facilitating a question and answer session. If at any time during the call you require assistance, please press star-zero and the coordinator will be happy to assist you. As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mr. Taylor Pickett, Chief Executive Officer of Omega Healthcare.

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 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 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, and 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 the non-GAAP measures, are included in our press release issued this morning or in the case of per-share information, available under the financial report section of our website at omegahealthcare.com.

I will review FFO dividends, our professional liability expense accrual and current development activities. Adjusted FFO for the quarter is 22 cents per share. Bob Stephenson, our CFO, will detail the reconciling items, which relate to the redemption of preferred Series A shares and professional liability legal settlements to get to reported FFO.

Looking forward, without giving effect to any potential acquisitions, we project 2004 adjusted FFO will be 88 to 90 cents per share and the 2005 adjusted FFO will be 96 to 98 cents per share.

Turning to our common dividend, as we announced last week, common shareholders a record on July 30, 2004, will be paid a dividend of 18 cents per share on August 16, 2004. At 18 cents per share, our dividend payout ratio is approximately 82 percent of adjusted FFO, which is in line with our Board's current view that 80 to 85 percent is an appropriate payout percentage for Omega.

During the quarter, we recorded a $3 million expense accrual related to professional liability lawsuits. These lawsuits related back to 2000 and 2001 where Omega had owned and operated facilities; that is, where Omega was the licensed operator. All of these facilities have been released or sold, and Omega is not, and does not intend to become, the licensed operator of any facilities. At the beginning of this quarter, we had 11 open claims. In late May and early June, we mediated all of the uninsured lawsuits and reached settlements, thereby eliminating our balance sheet risk related to this issue. There are five remaining lawsuits, all of which have insurance coverage beyond certain deductibles. We believe our current remaining accrual of 1.8 million will be sufficient to cover our projected costs.

On the acquisition front, Omega continues to identify many senior care investment opportunities. At this time, we're not prepared to provide guidance related to the amount or timing of new investments.

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

Thanks, Taylor. Our affordable FFO on a diluted basis was $5.1 million or 11 cents per share for the quarter as compared to $8.5 million or 16 cents per diluted share in the second quarter of 2003.

During the quarter we completed the redemption of our Series A preferred stocks, and we recorded an accrual for the settlement of professional liability claims related to our former owned and operated portfolio, which resulted in approximately 5.3 million of charges that negatively impacted FFO.

These transactions and related charges are as follows: the redemption of our Series A preferred stock reduced our net income available to common shareholders by $2.3 million and thus reduced our FFO. This non-cash $2.3 million charge is associated with the write-off of the original issuance cost of the preferred A.

As Taylor previously mentioned, we recorded a $3 million expense accrual related to professional liability claims associated with our former owned and operated portfolio. When adjusting FFO for the $5.3 million of charges, our adjusted FFO is $10.5 million or 22 cents per share for the quarter. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter was 22.3 million versus $20.4 million for the second quarter of 2003, when excluding owned and operated revenues from 2003. The $1.9 million increase was primarily the result of new investments made in April 2004, releasing and restructuring activities completed throughout 2003 and during the first quarter of 2004, as well as scheduled contractual increases.

Turning to operating expenses, for the quarter our expenses of 7.2 million were in line with operating expenses of 7.7 million a year ago when last year’s expenses adjusted for the effect of eliminating owned and operated assets. Interest expense was $6.2 million for the quarter and included a half a million dollars of non-cash related interest cost.

Turning to the balance sheet, year-to-date total assets increased approximately $23 million versus December 31, 2003 primarily due to two separate acquisitions made during the quarter. At June 30, 2004, we had approximately 2.7 million of cash on our balance sheet and credit facility availability of $135 million. Today we currently have approximately 140 million of combined invested cash and availability.

On the liability side of the balance sheet, we had approximately $339 million of debt at June 30, 2004. It's important to note Omega has no debt maturities prior to June, 2007. At June 30, 2004, Omega's total debt to EBITDA was 4.1 times and our fixed charged coverage ratio was 2.0 times.

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

Thanks, Bob, and good morning. As of June 30, 2004, Omega had a core asset portfolio of 205 facilities distributed among 39 third-party operators located in 29 states. During the second quarter of 2004, Omega closed on new investments of 35 million. The investment activity involved two separate transactions: one was a $26 million purchase of three facilities in New England, and the other was a $9.5 million acquisition of two facilities in Texas. Yields for these two investments were 10.25 and 11 percent respectively. Both acquisitions were done on behalf of existing tenants and the accompanying leases were combined with existing master leases.

Net investment activity for the quarter was 30 million, reflecting the payoff of a $4.5 million mortgage loan on five facilities in Missouri. In addition to these two transactions, Omega has identified a number of other senior care investment opportunities, primarily leveraging off of our many current operator relationships. As of today, and as Bob noted, Omega has approximately $140 million of available capital to fund these potential acquisitions.

Turning to portfolio performance, operator coverage ratios continued to improve in the first quarter of 2004. Trailing 12-month EBITDAN coverage for the period ended 3/31/04 was 1.57 times versus 1.53 times for the period ended 12/31/03. EBITDA coverage also improved to 1.12 times as of 3/31/04 versus 1.08 times as of 12/31/03. It is important to note that coverages for Omega's portfolio have either remained stable or improved in each of the last six quarters.

Thank you, Dan. In summary, we continue to focus on managing and where possible, upgrading our existing portfolio, managing our balance sheet to continue to improve our credit ratings and building our acquisition pipeline to opportunistically grow the portfolio, which will create more diversity in incremental FFO. This concludes our prepared comments. We will now take questions.

Your first question comes from Jerry Doctrow of Legg Mason.

Good morning. I just had a couple of things. One, I just wanted to explore a little bit more of this -- your $3 million charge for liability costs. I'm trying to just make sure that that's kind of a one-time item; we don't expect more of it. I know you're out of the operating business now, but just making sure there's not a liability tail to worry about.

Yes. We are very comfortable that the 11 claims that we had at the beginning of the quarter were all of the claims that we are going to face related to our ownership back in 2000 and 2001, or our licensure in 2000 and 2001. The six cases that we mediated and resolved were uninsured and they're gone, and we have five remaining cases that have insurance caps. And we have an accrual that we're very comfortable will be sufficient to handle any expenses.

Okay. And then Taylor, I was wondering if you could maybe just give us a little bit more color just on the acquisition environment. I mean, there have been some deals announced by, you know, competitors with cap rates, I think, below those that you're seeing. If maybe you could just give a little color for what's out there in terms of both cost and maybe in quantity.

There are -- the market, there are a number of a transactions out of the market. There are some that Dan indicated we've identified within our own portfolio and then there are a few larger deals that are being shopped around. So there's some activity and I would expect we'll continue to see activity in the acquisition market. As it relates to yields in cap rates, we're seeing more competition as it relates to yields in cap rates, and I think it's going to become much more portfolio-specific. And I don't foresee that that competition will lighten up in the near future.

And do you see nursing home yields at least -- I guess revenue rather than cap rates -- you know, staying north of 10 percent for you guys? Is that -- do you think that's achievable?

From our perspective, it -- we think it's achievable and if we start slipping below 10, you know, we have to think about where we deploy our funds and whether the spreads make sense for us at (inaudible) 10.

Okay, thanks.

Your next question comes from Ann Chattel (ph) of UBS.

It's actually Ray Garson (ph). Just a couple of quick questions. First, just kind of more detailed stuff. Do you have cash flow from ops and CapEx for the quarter?

I don't have it in front of me. If you give me a call after the call, I'll go into detail on that with you.

Sure, thanks. And then just -- the next question is just related to your mortgage portfolio. Just do you have any visibility on what you expect in repayments there and in particular, I think there's a slog (phonetic) related to Mariner and what your thoughts are given, you know, the potential, I guess, acquisition of that company and how it pertains to your mortgage debt there?

Yes. Mariner, we haven't heard anything from Mariner specifically. That mortgage is our biggest mortgage. It’s a $59 million investment and there -- Mariner does have a right to repay that investment in the first six months of 2005. We don't know what the Inquirer might do there. Our view is that we would either put that money back to work in more of our core, which is owning and leasing facilities, or if we were to receive that cash back and we didn't have a place to deploy it from an investment perspective, we might look at redeeming the preferred Balance sheet, which are 8 5/8 and they’re currently redeemable.

So we don't know what Mariner is going to do. We feel comfortable we have a big pipeline building and there may be opportunities to put money back to work if it comes our way. In the event that we don't have investments in hand at that point in time, we do have kind of a safety valve in terms of the Preferred B, which, you know, is not a bad answer for us in terms of improving fixed charges and being minimally dilutive.

That's fair. But outside of Mariner, the 4 million in the first quarter, is that -- from a modeling perspective, would we expect to see similar type amounts throughout the balance of the year or is that -- is there -- I mean, I guess, is there any way to talk about the cash receipts you expect on that --

There's only -- there's one other mortgage portfolio that has a due date this year and that's a $10 million mortgage. And then the balance of our mortgages, excluding Mariner, all have very long maturities and no pre-payment terms.

Thank you.

Your next question comes from Henry Rupov (ph) of Duetsche Bank.

Good morning, guys. Just a couple of quick questions. On the professional liability, the insurance -- I guess you said it's covered by insurance. Is there a, you know, a cap and then the deductible amounts, I guess, on each policy?

Yeah. They're -- under each policy year, there is a self-insure retention as well as an aggregate limit as well.

Why don't you give him a sense of the retentions and the limits?

Yeah. Typically, it's on a per-claim. In aggregate, it's a $10 million limit, of which, as Taylor said, based on the accruals that we booked and the claims that have been settled, we think we're in -- there should be no additional exposure, per se.

Okay. And is there a -- it's a 10 million aggregate per claim and is there a deductible with -- where did you set those?

I'm sorry, I missed that.

The deductible, I guess --

It's a self-insured retention and it depends -- it's a little complicated because it does depend on the particular state, but in general for the insurance policy, it would be like a $500,000 self-insured retention.

Retention, okay. And then just -- I saw the shelf filed the other day. The, I think 4.25 or so, that's still a target leverage level that you guys are comfortable with?

Yeah. We’re -- you know, we'll move around 4 and we're, you know, a little -- a tiny bit above that, but our view is 4 is our target. You know, we’ll move up towards 4.25 as we put deals on the line and, you know, then we'll take it back down. But that continues to be our target.

Okay. We heard about Mariner, but any operators out there a little slow or anything? You know, any concerns with any particular operators that you have right now?

Really for the most part, our credit quality has just continued to improve. We've still got a very small handful of stragglers. They're very small in size and they've been -- they continue to pay. It’s just a matter of having underwater coverages in certain instances.

Okay. But on a very small number?

Very.

Okay. Thanks very much.

Once again, ladies and gentlemen, it's star-one for questions. There are no further questions at this time. I'd like to turn the call back over to Mr. Taylor Pickett.

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

Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. ??

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