Omega Healthcare Investors Inc (OHI) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Omega HealthCare Investors Incorporated third-quarter 2005 earnings conference call. My name is Anne-Marie, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS).

I would like to turn the presentation over to Mr. Taylor Pickett, Chief Executive Officer. You may proceed.

Thank you. Good morning.

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, rent payments, financial condition or prospects of our operators, and 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 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. 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 Reports section of our Web site.

This morning, I will review Adjusted FFO, our common dividend, and potential transactions. Adjusted FFO for the third quarter is $0.27 per share, up from $0.26 in the second quarter. Our year-to-date Adjusted FFO is $0.78 per share. We reaffirm our 2005 Adjusted FFO guidance of $1.04 per share. 2006 guidance will be provided with our fourth-quarter results in January.

As we announced last week, common shareholders of record on October 31, 2005 will be paid a dividend of $0.22 per share on November 15, 2005. This reflects an Adjusted FFO payout ratio of approximately 81%.

Turning to potential transactions, although we did not close any acquisitions in the third quarter, the pipeline is active. We're working on several potential skilled nursing facility deals with current operators that look promising.

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 $8.2 million or $0.16 per share for the quarter, as compared to $10.5 million or $0.22 per diluted share in the third quarter of 2004. During the quarter, we recorded a non-cash, 5.5 million provision for impairment charge. The impairment reflects Accounting in accordance with FAS 144. Our Adjusted FFO guidance is not affected by this charge. When adjusting FFO for this charge and a non-cash restricted stock expense recorded during the quarter, our Adjusted FFO is $13.9 million or $0.27 per share for the quarter. Further information regarding the calculation of FFO was included in our earnings these and on our Web site.

Operating revenue the quarter was $26 million, versus $21.2 million for the third quarter of 2004. The $4.8 million increase is primarily a result of over $138 million of new investments made since the third quarter of 2004, as well as scheduled contractual increases.

Turning to operating expenses, for the quarter, our operating expenses of 8.2 million, which excludes the 285,000 restricted stock expense and the 5.5 million provision charge, were in line with expenses of $6.8 million a year ago with the increase associated with increased depreciation and amortization expense of 1.4 million, primarily related to the 2004 and 2005 acquisitions.

Interest expense was 8.2 million for the quarter and included $0.5 million of non-cash-related interest cost.

Turning to the balance sheet, year-to-date total assets decreased approximately $4.7 million versus December 31, 2004. At September 30, 2005, we had approximately 800,000 of cash on our balance sheet and credit facility availability of $115.4 million. On the liability side of the balance sheet, we had $443.5 million of debt at September 30, 2005.

For the three months ended September 30, 2005, our total debt to EBITDA was 4.5 times and our fixed charge coverage ratio was 2.3 times.

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

Thanks, Bob, good morning.

As of September 30, 2005, Omega had a core asset portfolio of 216 facilities distributed amongst 38 third-party operators, located within 29 states.

Operator coverage ratios continued to stabilize and/or slightly improve in 2005. Trailing 12 month EBITDARM coverage for the period ended 6-30-05 was 1.9 times, versus 1.8 times for the period ended March 31, 2005. Trailing 12-month EBITDAR coverage was 1.4 times as of 6-30-05 versus 1.4 times as of 3-31-05.

Omega continues to identify and develop new investment opportunities, primarily in the skilled nursing home sector. Omega currently has approximately $118 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.

As of today, Omega has approximately $200 million of transactions in the due diligence phase of our pipeline. This is comprised of four separate transactions with existing operators. The timing and certainty of these transactions is presently unknown.

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

Thank you, sir. (OPERATOR INSTRUCTIONS). Chris Pike with UBS.

Good morning, gentlemen. I guess just a couple of issues or items that I'd like to talk about. First is the dividend. I'm just wondering. When does the Board talk about pushing the dividend? You're at 81% of payout this quarter, I think. You had indicated previously that you'd like to be at, like, 85. Year-to-date, you're taking up (ph) $0.65, but even at $1.04, that would assume, at a 85% payout, you're still going to maybe increase the dividend going forward. Maybe you can add some color on that?

Sure. We've always talked about 80 to 85% of payout as a the range. We've consistently been about $0.04 less than FFO. The issue for us going into in the fourth quarter is we've got a couple of things happening. We have the announced potential sale of the Southpoint facility and the Alterra portfolio, which is about $35 million of proceeds that we've received back that could affect our FFO if we weren't able to put it to work. On the flip side, we have an active pipeline with deals that are in the diligence phase, which leads us to believe that, at some point, some of those deals will close and we will be able to put that money to work. Therefore, our $0.27 in the third quarter might continue along. It comes down to timing, and so I think you see a little bit of conservative -- some conservatism from the Board in the third quarter that, assuming the pipeline deals pan out and we are able to put our money to work and we continue at $0.27 for more, you'll see the dividend go up.

Okay, you said $25 million in proceeds from Alterra and Southpoint?

35.

35, okay. That's the gain or the book?

That's the cash proceeds.

Okay, fine, so less any type of encumbrance or any other kind of issues to offset the sale?

If there's no encumbrance, the 35 million of cash would do onto our balance sheet and there would be a gain, but then obviously we need to put that money back to work. Hopefully, with some of what's in the pipeline, we can put it to work rapidly.

You indicated you have 200 million in the pipeline -- at least in due diligence phase. What's the larger pipeline look like? Maybe you can provide some color in terms of actual deal flow now versus, let's say, in the beginning of the year. That would be great.

The deal flow now is interesting in that I don't think that it's better than at the beginning of the year. We've looked at a lot of transactions. We have some other deals in the pipeline, but from our perspective, as Dan mentioned, the deals that are in diligence today are all with current operators. Our current operators remain acquisitive, and we continue to look at opportunities with them as partners. So, there is more behind the deals that are in the diligence portion of the pipeline. To put a number around that -- I mean, you know -- (multiple speakers).

Well, I'm just looking from a directional perspective. In other words, have you seen cap rates start to push out? Maybe you start to see some more deals come in? You know, given the movement in rates, maybe given the concept that ILF and ALF buyers understanding the risk in the SNF Arena, starting to feel the pinch or maybe they are starting to see opportunities in a segment of healthcare REITs that they feel more comfortable in. I'm just trying to get an understanding for how much product is out there, if it's an easier or if it's -- is it becoming easier to source deals and why?

Right now, Chris, it's not becoming easier to source deals. I think it is -- what we're seeing today has been fairly consistent through the year. Dan, why don't you go ahead?

Chris, there's also -- there's just a lot of money out there. I don't think the number of deals -- it's a little bit choppy over the year. The early part of the year was actually pretty slow, then it picked up. I would say it has slowed down a little bit. There's still -- we see a ton of money out there looking at deals, which is why we've kind of stuck to our knitting with our existing operator group, who overall has been pretty good in feeding us deals.

Are there any larger deals you're looking at, like significant portfolio deals with folks that you're not accustomed to working with?

We've looked that -- we have looked at a few, but nothing that has momentum, from our perspective.

I guess, just my final question, is with respect to funding -- you know, you walked through -- you have about 118 million in dry powder. Understanding you can increase the line, I'm sure that's just a near-term phenomenon and you're probably going to look to turn that out at some point with some longer-term capital or more permanent capital. Could you comment on what your thoughts there are?

Well, you sort of covered it. Yes, if we used the revolver to do deals and we have the accordion feature for up to another 100 million, plus we will have proceeds from the sales we've previously mentioned, so we have a fair amount of available liquidity, and that's fine. We would use it, but you will see our leverage push up towards 5. As we've always indicated, we are comfortable in 4 to 5 range and we would look to take the leverage back down into the low 4s, which means some form of equity capital.

Okay, great. Thanks a lot, gentlemen.

Jerry Doctrow with Legg Mason.

I had just a couple of things. In terms of just yields on the new investments, you know, I think previously you had been looking around 10%. Is that holding up or are we seeing some downward pressure?

Jerry, it's still holding up. All of that stuff that we're looking at today is 10% or more.

Okay, that's great. Then -- just on the sort of workouts, I don't know if you want to just stay there, Dan or Taylor, but most of it was sort of gone. I was just trying to remember if there is any other stuff that you've still got sort of on disposition. I know you've got some (indiscernible) and assets held-for-sale. Is that just the two that are expected to close here or is there any other stuff?

There's one other facility that is currently operated by Sun Health in northern California; it's got a net book value of about $1.2 million. We're looking to sell it. We had some offers in -- actually north of that number, and we are working through a process there. We're not in a hurry; we don't receive any rent, so it's modest but any transaction there would provide a little bit of cash, a little additional capital.

Okay, and nothing else, so we're basically done?

We are basically done. I mean, we all the time are looking at what I will call "cleanup opportunities," but it would be similar to what I just talked about, you know, a single asset probably out of a bigger portfolio that any transaction wouldn't change our overall rent (ph) at all but might provide additional capital to the Company.

If you could just remind me, I know that you've got this performance incentive when you hit -- is it $0.33 of FFO per quarter, or whatever -- that you guys --?

You are raising my target!

Oh, sorry! (LAUGHTER).

It's $0.30.

$0.30, okay. Thanks. Then if you could just give me maybe a few minutes -- just your general sense of what's going on sort of broadly in the SNF business. Particularly are you seeing more consolidations? I mean, your guys seem to be doing acquisitions. Are those sort of regional operators consolidating or can you just give me a little sense of how you see sort of the broader dynamics?

You know, I think the dynamic is one that's been going on for a couple of years. It is a movement with -- there are, in every market, a handful of professional -- what I would call professional, regional operators that have been in the business for a long time; they are aggregating assets. They tend to keep them in their local market, and they will continue to identify opportunities. The leverage off what you've seen with a lot of these operators is they've done pretty well; they continue to do well. They've created capital within their own balance sheets to expand, and they are looking to do that. So, we continue to see that as a trend.

Then, you are also seeing, for some of these bigger portfolios, where venture guys made investments several years back, they are looking at monetizing, so you're seeing those type of transactions, whether it's the skilled healthcares of the world being sold, or the tandems of the world going public. You know, those are the type of things that we're seeing on a bigger scale. I don't know that that's a trend; I think that's just the natural cycle of investment and then people taking their return.

okay, and your regional guys are mostly buying mom-and-pops; they're not buying so much stuff coming out of other public companies, or the divestiture business has gained sort of kind of over (ph) from the big guys?

Yes, I think that's exactly right.

Okay, great. Thanks a lot.

(OPERATOR INSTRUCTIONS). A follow-up from Mr. Chris Pike with UBS.

Just one other question -- just in terms of the impairments, I guess I just want to make sure I'm totally clear here. I don't want to put words in your mouth, but it just sounds to me like your council, on the accounting side, it seems like you're just being very conservative in the way in which you look at or in the way in which you present financials. Is that a fair assessment?

I think, in general, yes. I think you've see the accounting world being very conservative in terms of approaching the balance sheet and analyzing the balance sheet on a quarterly basis. You know, part of what happens is that every quarter when you do an analysis, you can have a situation where something may look a little bit less positive and you'll see the accountants jump on that and look for the impairments. But for the most part, our view is the portfolio is very, very solid and these are anomalies.

So these are more cycular (ph) occurrences or (indiscernible) from or recommendations, if you will, versus more secular operating trends in the underlying business?

I couldn't say anything about it.

Great; I just want to be square about that.

Scott O'Shea with Deutsche Bank.

Good morning, guys. A quick question on your lease coverage for next year -- do you see the EBITDAR coverage, the one for holding? Would that potentially slip a little? Any outlook on that number?

Our view is that -- we've talked about EBITDAR being stable, and our sense is that it will continue to be stable. Yes, I think that the changes in reimbursement are going to end up being quite modest when it's all said and done. We still have a few portfolios where we would expect operational improvement -- ignoring the reimbursement front -- that would offset any slight reimbursement effect that we might have. So my sense is we'll be looking at 1.4 throughout next year.

Okay, that's great. Also, what percentage of your portfolio today would be covered by master lease pools?

Virtually all of the portfolio -- (multiple speakers).

Virtually all?

You know, we have a couple of one, single-facility operators, so to call that a master lease would be odd.

(LAUGHTER). Is there a view that you would want to clean those up, or are those otherwise strong properties that, even on a stand-alone basis, you're comfortable with the risk?

Virtually all of those are strong properties. The way that typically happened is, when we went through our restructuring several years ago, certain properties, individual properties would end up in operators' hands because we felt like they were the best to turn it around, or they already had a big, regional presence. So, you know, our preference wouldn't be to have that scenario but to the extent the operators are performing, we are happy with that.

My last question kind of gets to maybe some obsolescence risk in the portfolio. Are you seeing any issues with operators maybe looking to build new facilities that might cater more towards an upscale, private-pay market or potentially transferring a license out of some of these properties, either near-term or farther down the road? Is that a concern at all?

Not a concern -- I think maybe an opportunity. We don't -- we are seeing a little bit of that today, a very little bit.

But I think it's reasonable to look out five years and think about that as a trend. I don't see 20% of this industry's portfolio turning over or inventory turning over. But will we see more of that? Yes, for sure. We would look at that as an opportunity. You know, operators just can't take the license it has and move them without our agreeing to that.

Okay, that's helpful. Thank you.

There are no further questions at this time. I would like to turn the conference back over to Mr. Pickett for any closing remarks.

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

Ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a great day.