Omega Healthcare Investors Inc (OHI) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by and welcome to the Q3 2004 Omega Healthcare Investors Inc. earnings conference call. My name is Carlo and I will be your coordinator for today's presentation. At this time, all participants are in a listen-only mode and we will be facilitating a question and answer session towards the end of the conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Taylor Pickett, Omega President and Chief Executive Officer. Please proceed, sir.

Good morning and 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 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 filings with the Securities and Exchange Commission, including without limitation our 10-K or 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 measures 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 reports section of our web site at omegahealthcare.com.

I will review adjusted FFO, common dividends, senior executive restricted stock awards and expanded reporting. Adjusted FFO for the quarter is 23 cents per share. Bob will detail the reconciling item which relates to restricted stock expense to get to reported FFO.

Looking forward and taking into account likely acquisitions currently in the pipeline and capital transactions, we project that 2005 adjusted FFO will be $1 to $1.02 per share, up from our prior production of 96 to 98 cents per share. We will periodically update our projections for new acquisitions and portfolio changes.

Turning to common dividends, as we announced last week, common shareholders of record on October 29, 2004 will be paid a dividend of 19 cents per share on November 15th, 2004. This reflects a one-penny increase from last quarter and an adjusted FFO payout ratio of 83 percent.

Restricted stock expense. The compensation committee on the Board of Directors, which consists of all of the board members excluding me, selected and worked with an independent compensation consultant to negotiate, revise and extend all of the senior management employment agreements. The committee decided not to grant any stock options. Instead, the committee is elected to use restricted stock to retain and reward senior management.

There are two components of the restricted stock rewards. One vests over time through January 1, 2007 and one invests when the Company achieves FFO of 30 cents per share for two consecutive quarters. Omega has decided to separately disclose this expense for several reasons. First, it is a material non-cash item and we believe similar to stock options. It is meaningful to look at the dilutive effect of the shares separate from the accounting expense. Second, because 50 percent of the potential grant is contingent upon performance, the expense is not very predictable and we could have future quarters in which reportable FFO is significantly impacted by accounting accruals. Third, Omega's dividend policy and payout ratio will be based on adjusted FFO.

Turning to expanded reporting, with the stabilization of our portfolio and our current and anticipated growth, Omega has expanded its quarterly reporting to provide additional data for our shareholders and other constituents. Now our earnings press release includes, among other things, a breakdown of revenue by region and operator, ranked coverage data, a schedule of debt maturities and a schedule of lease and mortgage maturities. Bob Stephenson, our Chief Financial Officer, will now review our third-quarter financial results.

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was 10.5 million, or 22 cents per share for the quarter as compared to $6.6 million, or 11 cents per diluted share in the third quarter of 2003. As Taylor previously mentioned, we recorded a $279,000 expense accrual related to restricted stock awards and expect to record $837,000 in the fourth quarter of this year and $1.1 million in 2005. When adjusting FFO for the restricted stock expense, our adjusted FFO is $10.8 million, or 23 cents per share for the quarter. Further information regarding the cancellation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter was 22.6 million versus 20.6 million for the third quarter of 2003 when excluding owned and operated revenues for 2003. The $2 million increase was primarily the result of new investments made in April 2004, re-leasing 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 7.6 million, which included 279,000 of restricted stock expense, were in line with expenses of 7.4 million a year ago with last year's expenses adjusted for the effect of eliminating owned and operating assets. Interest expense was 6.4 million for the quarter and included $0.5 million of non-cash related interest costs.

Turning to the balance sheet, year-to-date, total assets increased 17.7 million versus December 31, 2003, primarily due to 34.6 million of acquisitions completed in the second quarter of 2004. At September 30, 2004, we had approximately $3.3 million of cash on our balance sheet and our credit facility availability was approximately $134 million. On the liability side of the balance sheet, we had 340 million of debt at September 30, 2004. It is important to note that Omega has no debt maturities prior to June of 2007. At September 30, 2004, Omega's total debt to EBITDA was 4.17 times and our fixed charge coverage ratio was 2.1 times. I will now turn the call over to Dan Booth, our Chief Operating Officer.

Thank you, Bob, and good morning. As of September 30th, 2004, Omega had a core asset portfolio of 205 facilities distributed amongst 39 third-party operators located in 29 states. There was no new investment activity in the third quarter of 2004. However, on October 14th, the Company announced that it entered into a binding put agreement whereby the Company agreed to buy the stock and/or assets of 13 skilled nursing facilities in the state of Ohio for the purchase price of $78.8 million. The holder of the put, American Health Care Centers and its affiliated companies, paid $1000 and agreed to eliminate the right to repay the current Omega mortgage in the event the option is not exercised.

While American has 90 days from the effective date of October 12 in which to exercise its option to sell the properties to Omega and if the option is exercised, then the transaction will close within 10 days. A portion of the purchase price equal to $6.9 million was paid by Omega to American in 1997 to obtain an option to acquire these properties and will now be applied to the purchase price in the event the option is exercised. The 13 properties are currently subject to a master lease with Essex Health Care Corporation.

The lease and related agreements have 6.5 years remaining and in 2005, annual payments are approximately $8.9 million with annual escalators. The Company currently holds a $14 million mortgage loan to American and its affiliates, encumbering six of the 13 properties. The $14 million mortgage loan will be deducted from the purchase price at closing, making Omega's net investment of new capital approximately $58 million after applying the $6.9 million purchase option and the $14 million mortgage loan. Trailing twelve-months EBITDAR coverage for the American portfolio was 1.37 times, which will result in an increase in Omega's overall operator coverage.

In addition to the American acquisition, Omega has identified and developed a number of other senior care investment opportunities, all of which are in the skilled nursing arena. As of today, Omega has approximately $137 million of available capital to fund these potential acquisitions, including the American transaction.

Turning to portfolio performance, operator coverage ratios improved significantly in the second quarter of 2004. Trailing twelve-months EBITDARM (ph) coverage for the period ended 6/30/04 was 1.69 times versus 1.57 times for the period ended March 31. Trailing twelve-months EBITDAR coverage also improved to 1.23 times as of 6/30, versus 1.12 times as of March 31st.

It is important to note that coverages for Omega's portfolio have either remained stable or improved in each of the last seven quarters. The second quarter coverage ratio improvement was a result of a combination of factors, including overall improved operator performance and the continued turnaround of released facilities.

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

(Operator Instructions). Chris Pike, UBS Warburg.

Quick question on acquisitions. I did not hear the typical disclaimer about not providing acquisition that is going forward to '05. Does that still apply, or do you guys have a number in mind?

We're not providing guidance as it relates to acquisitions. In the $1 to $1.02, we are including acquisitions that are currently in our pipeline. And I'll just jump to what's the next question -- what are we including in our pipeline? And excluding the American transaction that Dan has already discussed, we have $80 million in the pipeline and we think a substantial portion of that will likely close and effect '05 performance.

Our issue is, we still don't have enough of a track record to go beyond that and say, okay, what else might be out there. So what we will do from a policy perspective as we develop a better track record, every quarter, we'll just update our guidance.

So I guess that really led into my next question. A couple of years ago, one of your peers took down a significant portfolio and overnight, they doubled their market cap. And to date, you guys have slowly increased the size of your acquisitions. So given the progress that your team has made over the last several years, if you guys were presented with the right portfolio, whether it be public or private at the right price, from what you're basically saying is that you still don't think you have the capacity on the balance sheet to take down a $200 or $300 million portfolio at this point. Is that correct?

I think we have the capacity to do it and I think the financing sources would be available to support us. We have not seen that opportunity.

So if you were presented with the right portfolio, public or private, regardless of your comments about not having a track record, you guys do think you have the capacity on the balance sheet to do something that's effectively not quite doubling your asset base, but a $200 to $300 million acquisition is not out of the ballpark?

Not at all.

Last question, in terms of the restricted stock, are there any provisions in the event that there was some action whereby Omega was purchased by another company? Does anything vest, or it is it all performance-based going forward?

There is a change of control provision. So in the event that there is a change of control, there is vesting.

Can you talk about that? What percentage or --?

All of it vests, and I cannot remember off the top of my head whether the incentive stock vests and is payable, or it vests and we have to wait some period of time. But it all does vest.

Thanks a lot.

Jerry Doctrow, Legg Mason.

I just wanted to get, maybe continue on the theme, a little additional color about investment assumptions. What are you seeing -- you said you were doing all skilled. What assumptions are you making about yield or where you're seeing yields?

I think our target has been 10 and above, in terms of what we're looking for in terms of yield. And that pretty much is what we have seen out there right now. We haven't -- at least in the skilled arena, we're seeing 10 and north.

On the American deal, I just wanted to get a little bit more color on the put. It's for not that large a transaction, it seems a little bit complicated. And a number of investors have asked me why the put. I'm assuming it's for tax reasons for the seller. But can you just describe the rationale for that, and again, maybe give us a little more color when you think it actually will close?

We had a purchase option, as I discussed, but it did not actually come into play until 2007. So we really approached the sellers to see if we could exercise early. And to do so, we had to put them in the same economic position in a tax perspective that they otherwise would have been in. So we did structure the put arrangement to really assist them economically. I'm not going to get into their personal tax issues, but that is hence why this structure came about. And we think it's more than likely, they will probably utilize the full 90 days before they exercise the put.

So this is really then becomes sort of a first quarter '05 transaction, in terms of closing?

Yes. I think from a modeling perspective, it's -- most of the quarter of '05 will have that transaction in it very early in the year.

A couple of other things. On the releasing, obviously, your lease is one (ph) for 220,000. I think on the last call, there were a few others that maybe were talked about releasing -- some Sun, some Claremont. Are they in that, or is there some more of this yet to come that we should be thinking about?

When you say are they and (multiple speakers).

Are they releasing? The 220 is just I guess one of those properties, the 220,000 I think was just one. Are there some additional releasings that we should be anticipating?

There are four properties left that are part of the releasing, and they are budgeted in our projected results for next year. We're not reporting any income on those four properties today and we expect to have them working by the end of this year or early in the first quarter.

And no guidance in terms of what we should be assuming about how much releasing or when at this point?

Because we're in the process of putting these things out to market, we don't want to -- it's in the middle of a negotiation. But we've baked our assumptions into our projected number.

Okay. The Sun stock that's still on the books, I think it's like 760,000 shares, and I think there's a cash payment associated with it. Where do we stand on that?

The 760,000 shares are registered and tradable now. And we're just going to monitor Sun's performance. They have a third quarter call I think in the beginning of November and we'll see how the stock response to their performance. I expect Sun will continue to do well and at the some point, we're going to look to sell that stock either slowly or in a block trade.

Okay. And do you think it's fair then to just, if your assumptions assume that roughly 6 million or so of cash -- if my memory serves me correctly -- comes in as well, has that kind of been your assumptions?

We've spread it across the year.

Okay. One or two other quick things. G&A run rate, Bob, can you give me a sense of where we are in that? This quarter looks reasonably good or?

Yes, this quarter looks very good. Looking at our income statement just on the -- from the G&A and legal standpoint, again, as Taylor mentioned and I follow-up on the restricted stock, and I gave some info on what that is going to be so.

And then just ending share count, if you have it right there. Otherwise, we can get it offline.

The ending --?

Share count for the quarter.

46.6 million.

My last thing, there is a little bit of I think negative, if I read the earnings right, from a hedge. Can you just remind me what your interest rate hedge is? Is that something we should expect to move around a lot here?

What are you looking at, Jerry, because we have unwrapped all of our hedges.

I will come back and take a look. I thought I saw one that was going through the earnings statement, but maybe I just misread it.

Yes, we've unwrapped -- that was an old line item from prior years (multiple speakers).

Ray Garson, UBS Warburg.

Just a couple quick questions. You outlined your current revolver availability, but as you look forward and you went through the pipeline, do you expect most of these transactions to be debt financed? And then the next question would be -- does it make sense for you guys to potentially term some of that debt out in the near-term?

It does. The initial financing will be debt financed and we are looking at terming some of the debt out, either the bond market or similar alternatives. And then at some point, as we look at the future pipeline, we'll have to look at equity as well.

Sure. In terms of just overall leverage profile, do you still kind of want to stay under five, I think is what you have historically said?

We absolutely are going to stay under five as a target.

Okay. In terms of the cash-flow statement, do you all happen to have cash flow from operations? Is it in the quarter or year-to-date? And then did you have any mortgage repayments in the quarter? And if you did, can you give us that dollar amount?

The cash-flow statement I don't have in front of me. Starting next quarter, that will always be part the press release going forward. But from a fad (ph) standpoint, that is how I'm looking at it right now. Our fad is basically the same as our reported FFO -- or excuse me -- as our adjusted FFO because we do have some slight non-cash revenue offset by the non-cash expense and the restricted stock amortization.

Okay, thank you.

Scott O'Shea, Deutsche Bank.

Just to confirm, the 1.37 times coverage on the Essex portfolio, that is after management fees?

Yet, that is.

And am I looking at this correctly, that the 8.9 million that comes in, that's o an investment basis of roughly 79 million. So you're looking at roughly an 11.3 kind of cash on cash yield there. Is that the right way to look at it?

Yes.

Doesn't that seem awfully high for a portfolio that with those kind of property level coverages? Can you just reconcile that, or is that kind of market for this kind of stuff right now?

I think that you're right, it is a little bit high, which is one of the reasons we were anxious to accelerate the exercise of the option. We like the portfolio a lot, the coverages are strong and the yield is very high.

So what's not to like?

There is nothing not -- under the deal we had, we had to wait until 2007. That's why we approach the sellers, to see if we could work out something sooner. We think it's a real good use of money and it's a nice jump-start into '05.

Does the lease term affected -- it's roughly 6.5 years, that being kind of on the shorter side for these types of things -- does that affect the value at all, or not really?

You know, we looked at it and the owner that the lessee has a large investment in that company. We fully expect to be sitting down and talking with them. We've already had some initial conversations, but we expect to extend the term of that lease.

I think it will be a little different equation if the coverages weren't so strong. But with the kind of coverages we have and the quality of the portfolio, we feel pretty confident that this lease is going to be expended and that our economic terms are going to be maintained.

Okay, great. I just had a generic question, too, when you you're looking at deals out in the market. What is pricing like for one-off nursing homes? And then what would pricing be like for an equivalent pool of, say, six or seven properties that would fall under a master lease?

It's really going to vary on the quality of the asset -- the coverages, where it's located, the operators themselves and what sort of opportunities they have for financing. One-off transactions, we're not looking at a lot of them unless they are operators that are already in our portfolio. And on those type of transactions, we would expect to do a one-off and just add it to the existing master lease at the existing rate of return.

Right. Would the market normally require a premium for a one-off deal versus a pool, or would it go the other way, that it's easier to finance a one-off deal, rather than a larger transaction?

It really depends on the operator and their availability to capital. A lot of one-off transactions are not done by REITs necessarily, they're done by local banks and S&Ls. And their cost of capital varies widely. So once again, it depends on an operator's access to capital in their given markets.

Last question really is just, are all of your tenants current on their October payments as of today? Or does everybody have I guess a first of the month kind of payment date?

It varies. It's between the first and I think the 20th. We have one operator (indiscernible) small, I think it represents less than 1 percent who is not current. That's a two-facility master lease. I'm doing this off the top of my head. I think everyone else is current for the month of October.

Last thing, just thanks for the expanded disclosure. That's really helpful.

I'm sorry, let me back up on that, because I forgot about Claremont, who is another two (ph) facility master lease who's also not current.

Just to be clear, there is no revenue recorded. There is a contractual obligation; we don't record any revenue on the two that Dan just mention. So it's not, in terms of what you're looking at in reported numbers, there is no (indiscernible) up there.

When you said two, is that the Claremont two, or is that both of these operators, and combined, it's four?

Combined, it's four (multiple speakers) not two.

So it's not in the numbers at all?

That's correct.

Okay. That's it for me, thank you.

Sir, we have no further questions at this time.

Thank you very much for joining our call. Bob Stephenson will be available for any follow-up question anyone may have.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.