Omega Healthcare Investors Inc (OHI) 2005 Q4 法說會逐字稿

Welcome to the Omega Healthcare Investors Inc. fourth-quarter 2005 earnings conference call. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to Mr. Tom Peterson.

Thank you. Comments made during this conference call that are not historical fact 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 10-Q which identify specific factors that may 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. 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. I will now turn the call over to Taylor Pickett, CEO.

Thanks, Tom, and good morning. I will review adjusted FFO, our common dividend, acquisitions and capital market transactions. Adjusted FFO for the fourth quarter is $0.27 per share. Our full-year 2005 adjusted FFO is $1.06 per share. Our 2006 adjusted FFO guidance is $1.10 to $1.14 per share.

As we announced last week common shareholders of record on January 31, 2006 will be paid a dividend of $0.23 per share on February 15, 2006. This is a one penny increase over the prior quarter and reflects an adjusted FFO payout ratio of approximately 85%. Turning to acquisitions, in the fourth quarter we closed all of the transactions we had indicated or the due diligence phase of our pipeline during the third quarter. The transactions were all with existing Omega operators as follows, November 1st we closed a $13 million three-facility deal with Nexion Health, November 9th we closed a $62 million seven-facility deal with Haven Eldercare, and December 16th we closed a $115 million eleven-facility deal with CommuniCare Health Services. Dan will provide more detail in his operations overview.

Turning to capital market transactions, in the fourth quarter we raised 281 million in new capital that was used to fund the above acquisitions and pay off 100 million of Notes due in 2007. Specifically we raised the following, November 21st we raised $58 million via the sale of 5,175,000 shares of Omega common stock; December 2nd we raised $50 million via the sale of 7% unsecured Notes due 2014; and December 30th we raised 173 million via the sale of 7% unsecured Notes due 2016.

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

Thank you, Taylor, good morning. Our reportable FFO on a diluted basis is $12.6 million or $0.23 per share for the quarter as compared to $10.6 million or $0.22 per diluted share in the fourth quarter of 2004. During the fourth quarter of 2005 we had several transactions which impacted our reportable FFO and they are as follows. One, in December we initiated a tender offer and redemption of our 100 million 6.95% Notes due 2007, on December 30, 2005 approximately 79.3% of the 2007 notes were tendered and purchased with the remaining 20.7% being redeemed on January 18, 2006. As a result of the tender offer during the fourth quarter we recorded $2.8 million of refinancing interest expense.

Second, during the quarter we recorded a $463,000 provision for impairment to reduce the carrying value of one facility to its expected sales price; this facility is under contract to be sold during the first quarter. And third, during December we received 1.6 million of net cash proceeds associated with the settlement of a lawsuit. When adjusting FFO for these items and the non-cash restricted stock expense recorded during the quarter our adjusted FFO is 14.5 million or $0.27 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 27.3 million versus 22.7 million for the fourth quarter of 2004. The 4.6 million increase is primarily the result of approximately 200 million of net new investments made during 2005, as well as scheduled contractual increases. Turning to operating expenses, for the quarter our operating expenses of $8 million, which excludes the $285,000 restricted stock expense and the 463,000 impairment charge, were in line with expenses of $7 million a year ago with increases associated -- with the increased depreciation and amortization expense of approximately 1.2 million related to 2005 acquisitions.

Interest expense was $9 million for the quarter and included $551,000 of non-cash related interest cost. Turning to the balance sheet, year-to-date total assets increased approximately $182 million versus December 31, 2004. At December 31, 2005 we had approximately $3.9 million of cash on our balance sheet and credit facility availability of $138 million.

On the liability side of the balance sheet we had 566 million of debt at December 31, 2005. However, when factoring in the completion of the redemption we would have had 546 million of debt on our balance sheet. For the three months ended December 31, 2005, our total debt to EBITDA was 4.7 times and our fixed charge coverage ratio was 2.5 times after adjusting for the redemption of our remaining 20.7% of our $100 million bonds due 2007 and the incremental revenue from fourth-quarter acquisitions.

On January 20, 2006 Moody's Investor Services raised our senior unsecured debt rating to BA3, from B1 and our preferred stock rating to B2 from B3. I will now turn the call over to Dan Booth, our Chief Operating Officer.

Thanks, Bob, and good morning. As of December 31, 2005 Omega had a core asset portfolio of 225 facilities distributed amongst 35 third-party operators located within 27 states. Operator coverage ratios continue to stabilize and/or slightly improve in 2005. Trailing twelve-month EBITDAR coverage for the period ended 9/30 was 1.9 times versus 1.9 times for the period ended 6/30/05. Trailing 12 months EBITDAR coverage was 1.5 times as of 9/30 versus 1.4 times as of 6/30.

In the fourth quarter of 2005 Omega closed on approximately 190 million of new investments bringing total investments for the year 2005 to $307 million. Specifically on November 1, 2005 we purchased three SNFs in two separate transactions for a total investment of approximately 13 million. All three facilities totaling 400 beds are located in Texas. The facilities have been consolidated into a master lease with an existing operator with annualized incremental ramp of $1.3 million. The term of the existing master lease was extended 10 years and runs through 2015.

Subsequently on November 9, 2005, we announced the closing of a first mortgage loan in the amount of approximately 62 million, on 6 SNFs and one assisted living facility totaling 878 beds. Four of the facilities are located in Rhode Island, two in New Hampshire and one in Massachusetts. The mortgager is an existing operator of Omega. The interest rate is 10% with annual escalators and the term of the mortgage is seven years. At the end of the mortgage term we have an option to purchase the facilities for $62 million, less the outstanding mortgage principal balance.

Lastly on December 16, 2005, we purchased 10 SNFs and one assisted living facility for a total investment of approximately $115 million. The facilities totaled 1,610 beds and are all located in the State of Ohio. The facilities are subject to a new ten-year lease between Omega and one of its current operators. The annualized rent is approximately 11.6 million and contains annual escalators. In addition we have made available a one-year working capital line of credit totaling $12.5 million. Also during the quarter we sold approximately $24 million of assets for $35 million in cash proceeds generating a onetime accounting gain of a little over $11 million.

Thank you, Dan. THIS concludes our prepared comments; we will now take questions.

(OPERATOR INSTRUCTIONS) Jerry Doctrow with Stifel Nicolaus.

Just a handful of things. I guess some housekeeping things, maybe Bob first. Could you just touch on maybe the run rate for G&A, run rate for interest -- there's the moving parts I think during the quarter?

Our G&A run rate, Jerry, is approximately 2 million a quarter or 8 million a year. And then the run rate for interest?

Yes.

Well it's really the $9 million that I talked about for the quarter which ignores the $2.8 million of onetime expense refinancing each time.

Okay. And just a couple other things about acquisitions and stuff, maybe Taylor. In terms of just doing the working line I don't know that you've done it too often in the past, what is the thinking there and is it something we would expect to see more of going forward?

Working capital lines aren't our core business in this case it is a combination to the operator in CommuniCare and Dan maybe just want to add a little bit in terms of the one year term and our expectation there?

I think it was that deal was complicated -- took quite some time to actually close from start to finish -- the working capital line sub was really in the combination. We fully expect the operator to go out and rebid that to the market, they can command a far better rate than what we're providing.

We are charging 10%, Jerry.

Okay. Maybe just a little bit about your view kind of the skilled market, sort of in general, acquisition opportunities where pricing is going; I would be curious as to whether you think you're buying maybe below replacement cost at this point and just give me a little color there on the market?

The market is fairly active and the quality of product covers the whole spectrum from very, very high-quality product to some fairly poor product. We spend a lot of time looking at obviously lots of deals and sorting our way through. We've been able with our current base of operators to identify some fairly high-quality portfolios. And I think what you are seeing in terms of pricing for the high-quality portfolios is they are reaching towards what I would define as replacement cost. And that reflects both the quality of the asset, quality of the cash flows and to a large extent replacement cost tends to be for the most part theoretical because there isn't the opportunity to build new facilities.

Your RUGs refinement I guess coming, are you hearing anything from your operators about that? How do you think about, do you worry about it, how do you take this into consideration with your underwriting?

RUGs refinement, what you're talking about the nine-year RUGs category?

Yes and the potential that that actually puts some pressure, downward pressure on reimbursement.

From our perspective the higher acuity providers and the more sophisticated providers are going to do well with the additional nine categories. And that's always been our view. And I would say the majority of our portfolio and our operators are actually going to do -- are not going to lose reimbursement. They're going to be able to push -- they have patients that fit into those top nine categories. They may even identify more in terms of referrals. So I feel pretty confident that that is not going to meaningfully affect cash flows and our operators as a whole.

Are people retooling facilities? We just came off the Manor Care call, they are spending a fair amount adding new rehab capacity to some of their existing facilities and stuff. Is that something you are seeing any of or?

We are seeing some of that. In fact that the retooling of facilities and the improvement of facilities has picked up a bit. And we are working with a number of current operators on those sort of projects.

In terms of just yields on new acquisitions, is 10% still doable or is the pricing coming down a little bit off that, what should we be assuming?

Over the course of '05 I think it did come down from more of a 10.5 down to a 10. The deals we are looking at right now through are still in the 10% range.

But not higher.

Okay, great, thanks, guys.

[Robin Brody] with CRM.

Good quarter. Just a quick question on the recent announcement with the debt upgrades. I was wondering if you can discuss how that's going to impact your interest expense going forward? If you can tell me if there will be any opportunities to refinance some of your current debt at a lower rate?

Obviously we are happy about the upgrade and our ability to finance with the upgrade under our belts in the future. In terms of what's on the balance sheet today, we have some dollars on our revolving credit agreement. We would not want to refinance, we really can't refinance any of the 014 or go 016 bonds which is the bulk of our debt. We are looking at opportunities to improve our revolver pricing, that's in the early stages. As to the extent that we continue to do acquisitions if long-term rates hold we would look to continue to use ten-year bonds as part of our financing strategy. So to the extent that the upgrade improves our pricing that is beneficial.

(OPERATOR INSTRUCTIONS) Chris Pike with UBS.

Just a quick question, back to Jerry's question on caps. If I looked in the apartment sector and this just data RCA provides, newly offered deals, you start seeing some upward bias on caps. And you did take down an ALF in a recent acquisition. It's kind of a two-pronged question, more strategic. Given what some of your competitors are doing, forming JVs, going to MOBs, seeing as though the last couple of years. Is there any appetite for broadening your investment spectrum into other asset classes at this point or is it just going to be a pure play SNF going forth?

I think for the most part we are going to be a pure play SNF. Although if we see cap rates start moving back into a range where we can create spread we will look at other asset types. And as you mentioned we picked up a couple of assisted living facilities as part of other deals. To the extent that our current operators identify other opportunities like that we will look at them. But when it's all said and done, we are going to be spread driven and yield driven. And we are not going to -- we don't see a need to kind of buy our way down to diversify the balance sheet. If cap rates improve then you may see us look at some other property types. But that is not in the cards right now.

Have you guys entertained any other kind of structures whether it be JV or other, perhaps lever up and mitigate some of the (multiple speakers)

We have looked at that a bit and dabbled with it a bit. Frankly, given our cost of capital and the demands of in terms of JV partners and what they're looking for with respect to returns we haven't found an opportunity that would make sense for us.

Great, thanks a lot, folks.

We have no further questions at this time. I like to return the call back over to management for any closing comments.

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

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