Omega Healthcare Investors Inc (OHI) 2005 Q2 法說會逐字稿

Today ladies and gentlemen and welcome to the second-quarter 2005 Omega Healthcare Investors Earnings Conference Call. My name is Angela and I will be your coordinator for today. [ Operator Instructions] As a reminder this conference is being recorded for replay purposes. Now, I would like to turn the presentation over to your host for today's call, Mr Taylor Pickett, CEO. Please proceed, sir.

Thank you. Good morning and thank you for turning our second-quarter conference call. Comments that are made during this call that are not historical facts may be forward-looking statements, such as statements regarding our financial and FFO projections, policy, portfolio restructuring, rent payments, financial condition, or prospects of our operators in the business and portfolio outlook generally.

These forward-looking statements involve risks and uncertainties which may cause actual results to differ materially. Please see our their press releases, our filings with the Securities and Exchange Commission, including without limitation Form 10-K and Form 10-Q, which identify specific factors which may cause actual results or events to differ materially from those described in forward-looking statements.

During the call today, we were refer to some non-GAAP financial matters, such 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 a general 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 Report Section" of our website at omegahealthcare.com

I will review adjusted FFO, common dividends, and recent transactions. Adjusted FFO for the second quarter is $0.26 per share, up from $0.25 in the first quarter. To get to adjusted FFO, Omega made the following adjustments; first, we reduced FFO by approximately two and a half cents related to cash revenue that we received as part of the Mariner loan pay-off. Second, we increased FFO by approximately 12 and a half cents for predominately non-cash expenses. There are four components FFO add-back adjustments.

Approximately $.04 relates to the Series B preferred stock redemption, and the write-off of the original issue costs of the Series B preferred stock. Approximately one and a half cents relates to the write-off of security deposits, and an accrual for potential obligations related to a lease that expired during the quarter. Omega and the property owner have an ongoing dispute regarding Omega's obligation, if any.

Third, approximately $.07 relates to the FAS-115 impairment of Omega's Sun Healthcare common equity. Omega has owned 760,000 shares of Sun stock since March 2004, was received as consideration in connection with restructuring of certain lease agreements with Sun.

The stock has declined in value and Omega's auditors have taken the position that in part, due to the length of time that Sun stock has been below Omega's book basis, that Omega must record the FAS-115 impairment.

In my opinion, the duration of time that Sun stock has been below market does not in any way reflect upon Sun's prospects. Both in Sun's underlying financial performance and in Sun's stock price. Sun's consolidated business and Omega's facilities continue to perform well.

Omega is very confident about Sun as an operator and with respect to our Sun equity holding, and we look forward to seeing the financial results after Sun closes on their previously announced peak acquisition. This is partially reflected in the fact and that we currently have an effective registration statement and could sell Sun shares at any time, but instead, have elected to maintain our Sun position.

I want it to be clear that the accounting treatment that is resulted in this non-cash impairment does not in any way reflect the change in Sun's operating results or Omega's view that Sun is one of the best operatives in the industry.

Finally, the balance of less than $.01 relates to restricted stock amortization and a minor note receivable write-off. We increased our 2005 FFO guidance to $1.03 to $1.04 per-share. This is up from our previous guidance of $1 to $1.02 to per-share.

Turning to common dividends. As we announced last week, common shareholders were record on July 29th, 2005 when will be paid a dividend of $0.22 per share on August 15th, 2005. This reflects a 1 penny increase from last quarter, and an adjusted FOO pay-out ratio of approximately 84%.

During the quarter, we closed on 59 million in new investments. We also sold 4 facilities for 17.4 million and announced the planned sale of 1 facility for $14.5 million. Bob Stephenson, our Chief Financial Officer, will now review our second-quarter financial results.

Thank you, Taylor. Good morning.

Our reported FFO on a diluted basis $8.1 million, or $.16 per share for the quarter, as compared to $5.1 million, or $.11 per diluted share in the second quarter of 2004. As Taylor mentioned earlier, during the quarter we recorded a non-cash $3.4 million provision procurement charge. A $2 million non-cash preferred stock redemption charge, and 750-K lease expiration accrual, and 83-K provision for uncollectible notes receivable, and we also reported approximately 1 million of one-time revenue associated with the first-quarter Mariner mortgage loan pay-off. When adjusted FFO for these charges, and the non-cash restricted stock expense reported in the quarter, our adjusted FFO is $13.6 million or $.26 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 25.8 million, versus 21.3 million for the second quarter of 2004. The 4.5 million increase is primarily the result of over 200 million of new investments made since the second quarter of 2004. With one-time revenue associated with the mortgage pay-off as well scheduled contractual increases.

Turning to operating expenses for the quarter. Our operating expenses of $8 million, which exclude the 750-K lease expiration accrual, the provision for uncollectible notes accounts receivable and the 285,000 of restricted stock expense were in line with expenses of 6.8 billion a year ago with the increase associated with the increased depreciation and amortization expense of $1.2 million, primarily related to the 2004 in 2005 acquisition. Interest expense was 7.5 million for the quarter and included a half million dollars of non-cash related interest costs.

Turning to the balance sheet. During the first and second quarters, we had a number of major transactions which impacted our balance sheet. They are as follows. We completed approximately 120 million of new net investments year-to-date. We fully redeemed $50 million, 8.625% Series B preferred stock. We sold 4 facilities for approximately $12 million in cash proceeds and a $5.4 million note but during the second quarter.

Mariner Healthcare repaid a $60 million mortgage loan in the first quarter. We sold 3 facilities for approximately 6 million in cash proceeds during the first quarter, and we recently announced the pending sale of 1 facility for $14.5 million dollars, which has a net book value of approximately $8 million. As result of these transactions, year-to-date total assets increased approximately $20 million versus December 31st, 2004.

At June 30th, 2005, we had approximately half a million dollars of cash on our balance sheet and credit facility availability of $95 million. As of today, we have combined cash and availability of approximately $150 million.

From the liability side of the balance sheet, we have 465 million of debt as of June 30th, 2005. It's important to note that we have no debt maturities prior to June, 2007. For the three months ended June 30th, 2005, our total debt to EBITDA was 5.7 times and our fixed charge ratio was 2.0 times. However, when adjusting for the elimination of the one-time revenue item, the provision for impairment, and adding incremental revenue associated with second-quarter acquisitions, our total debt to EBITDA run rate was 4.6 times and our fixed charge coverage ratio was approximately 2.5 times. I will not turn the call over to Dan Booth, our Chief Operating Officer.

Thank you, Bob, and good morning. As of June 30th, 2005, Omega had a core asset portfolio of 216 facilities distributed amongst 38 third-party operators located in 28 states.

During the quarter Omega made gross investments of $59 million in two separate transactions.

The first transaction involved two skilled nursing facilities in Texas totaling 440 beds.

The second transaction included three skilled as the facilities in Ohio, and two skilled nursing facilities in Pennsylvania totaling 911 beds.

Both transactions were investments with existing operators. In addition, one Illinois operator purchased four facilities for approximately 17.4 million.

Omega continues to identify and develop new investment opportunities, primarily in the skilled nursing home sector. Omega currently has approximately 115 million in cash and credit availability to fund potential new investments.

In addition, Omega has the flexibility to expand its current credit facility from 200 to 300 million, upon notice and the addition of acceptable collateral.

Turning to portfolio performance. Operator cover ratio stabilized in the first quarter of 2005. Trailing 12-months in the dorm coverage for the period ending 3/31/05 was 1.8 times, versus 1.9 times for the period 12/31/04. Trailing 12-months in the dorm coverage was 1.4 as of 3/31/05, versus 1.4 as of 12/31/ 04. These numbers pro forma both acquisitions and dispositions in the first quarter 2005.

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

[Operator Instructions] Gentlemen, your first question comes from the line of Chris Pike with UBS. Please proceed. Mr. Pike, your line is open. Gentlemen, your next question will come from the line of Jerry Doctrow with Legg Mason. Please proceed.

Hi, I'm here. Let's see. Just a couple things, maybe Taylor, in terms of acquisition, strategy, and or sort of your use for capital. I was wondering if maybe you could give us a little feel for acquisition environment?

The thing that I'm worried about is, you know, as basic competition increases here, particularly, of maybe this other private pacing housing looking more aggressively at skilled nursing stuff, whether you find more competition, where do you go to find deals? And then, on the capital side, when you laid out your debt availability -- cash availability, and obviously, you've got the Sun stock, as well, which is kind of some hidden equity, perhaps, but at what point do you need to come back and access capital markets. Again, just how do you see those two things setting up?

Sure. In terms of product, it seems like there are more transactions out in the marketplace. They tend to be a little bit larger. We're, fortunately, still seeing deals -- the deals that we've recently completed with our current operators and that seems to be the best source of transactions for Omega.

Some of the larger deals out there, some seem like they are getting priced at premiums to where we've underwritten in the past. We're seeing a lot out there.

Our operators are seeing a fair amount of activity and, fortunately, we're able to do transactions with some of our current operators. On the capital front, we're going to be consistent with the model that we have discussed in the past, which is, we will use our revolver as the primary source of capital as we do acquisitions. And at the point in time that we don't have enough availability on our revolver to do our size acquisitions, sort of 10 million or 8 million, we will go back to the equity market and that's going to drive our timing.

Okay, and in terms of just acquisition volumes, the level that you're kind of doing this year, that is sort of a sustainable kind of -- general? Obviously, things sort of come in lumps, that is just sort of maybe where we are year today. Does that sort of feel like a sustainable level to view?

The way we look at it, we've really been in the acquisition business for about a year now, we've got about $200 million in deals in the last 12 months. So I it what I'd like to have that as a goal on a go-forward basis, but, as you know, it is very choppy, and that's not a huge target. But we've done a couple of deals that are fairly sizable. You know, for us, An $80 million deal. $60 million deal. $50 million deal. So, that might bring some choppiness over the next 6 to 8 months.

Okay. Thanks.

[Operator Instructions.] Gentlemen your next question comes from the line of Chris Pike with UBS. Please proceed, sir.

Sorry about that, guys.

How are you doing, Chris?

Good. Good quarter. I guess just a follow up on Jerry's point.

There has been some critics out there who look at the proxy and see that a $.30 run rate is when the restricted shares vest. Based on my calculations, you need to get the 300 to $400 million of accretive acquisitions in the next 18 months, because you need two consecutive quarters of that $.30 run rate.

Right.

So I guess I'm just wondering, you kind of alluded to that, do you feel kind of comfortable in that type of acquisition run rate? What do you say to those folks who say, "Hey, maybe you've got a little bit more sense to grow for growth's sake", given the contracts that are in place?

There are really a couple components to the answer. One is, if you ignore the rent escalators over time, you have to put that much volume on right away to kind of look at $1.20 run rate. So I look at it in the fact that we had our rent escalator's as a part of what drives some of our growth. And then look at acquisitions kind of at a normal pace over time and you're not far off.

I don't know that it's 300 or 400 million but,certainly, even with the rent escalators and the type of deals we underwrite, we need to be north of 200 million. Probably in the 2 to $300 million range. And that reflects, to some extent, the boards looking to incentives to find the right kind of deals.

Now, if we were just putting assets on for assets sake, probably wouldn't have pared from the portfolio what we did. That was a performing asset but in terms of paying rent, but an underperforming asset in terms of coverage. And we elected to pare from the portfolio because it's the right thing to do.

Our view is we're here to run the Company for the long run, and we are focused on that that goal. But we're going to stay in our underwriting box. We're not going to chase it deals down to yield curve, and we're not going to chase deals up in terms of pricing. If that means, we don't get deals done, that's just the way it is.

Great. Thanks a lot.

Gentlemen, at this time, we have no further questions in queue. I will turn the call back over to Taylor Pickett for closing remarks.

Thank you. Thank you for joining our second quarter call. Bob Stephenson, our Chief Financial Officer, will be available for any of follow-up questions you may have.

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Everyone had a wonderful day and thank you.