Omega Healthcare Investors Inc (OHI) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Omega HealthCare Investors, Incorporated second quarter 2006 earnings conference call. My name is Samuel, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will conduct the question and answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to today's host, Mr. Tom Peterson. Please proceed, sir.

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 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 reports 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, and the Litchfield transaction.

Adjusted FFO for the second quarter is $0.29 per share. Our 2006 adjusted FFO guidance has been increased to a range of $1.14 to $1.16 per share. In addition, our 2007 adjusted FFO guidance is $1.21 to $1.26 per diluted share.

Please note, our adjusted FFO guidance excludes the non-cash expense related to restricted stock grants. With the closing of the Litchfield transaction, there is a possibility that we will achieve our $0.30 per quarter adjusted FFO target, and therefore, we will have a large non-cash expense related to [divesting] of the performance based restricted stock grants.

As we previously announced, common shareholders of record on July 31, 2006, will be paid a dividend of $0.24 per share on August 15, 2006. This reflects an adjusted FFO payout ratio of approximately 83%.

Turning to the Litchfield transaction, we are very pleased to have closed the Litchfield transaction. Litchfield is our largest transaction to date. The Omega management team has had prior financing and operating experience with these facilities, and we are very confident that they will perform well. Furthermore, since the facilities were already operated by three current operators in our portfolio, the operator due diligence and facility transition issues are minimal.

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

Thank you Taylor, and good morning. Our reportable FFO on a diluted basis was $16.5 million or $0.28 per share for the quarter, as compared to $8.1 million or $0.16 per diluted share in the second quarter of 2005. When adjusting FFO for the non-cash restricted stock expense of approximately $300,000 recorded during the quarter our adjusted FFO is $16.7 million or $0.29 per share for the quarter. Further information regarding the calculation of FFO is included in our earnings release and on our website.

As Taylor mentioned earlier, as a result of the Litchfield transaction, there is a possibility that we will achieve our $0.30 adjusted FFO target related to our performance-based restricted stock grant. In accordance with FASB statement number 123(R), Share-Based Payment, compensation cost for a performance-based stock award shall be accrued for if it is probable or likely to occur.

During the third quarter, we will be analyzing the probability of achieving the $0.30 target. Although we cannot predict if the $0.30 per share target will be met, if we feel it is probable as defined under FASB statement number 5, Accounting for Contingencies, we will be required to record a cumulative catch-up adjustment to compensation expense.

In our 2006 adjusted FFO guidance, we have included approximately $4 million of non-cash restricted stock compensation expense. Operating revenue for the quarter was $31.1 million versus $25.3 million for the second quarter of 2005.

The $5.8 million increase is primarily a result of approximately 187 million of investments made since May of 2005 and scheduled contractual increases. This was partially offset by a reduction of mortgage interest income from a $10 million mortgage payoff that occurred in June 2006, and one time revenue associated with the $60 million mortgage, which was paid off in 2005.

Operating expenses were in line with last year. Increases in depreciation, amortization expense, and interest expense, reflect acquisitions made during 2005.

Turning to the balance sheet, year-to-date total assets decreased approximately $31 million versus December 31, 2005. The decrease was due to the January 2006 redemption of the remaining 20.7% of our $100 million 6.9% notes due and normal accumulated depreciations.

At June 30, 2006, we had approximately $14 million of cash in our balance sheet, and credit facility availability of approximately $197 million. As of today, we have combined cash and credit facility availability of approximately $50 million with a reduction since June 30th due to the $171 million Litchfield acquisition.

On the liability side of the balance sheet, we had $527 million of debt, at June 30, 2006, all of which matures in 2014 or later.

For the three months ended June 30, 2006, Omega's total debt to EBITDA was 4.6 times, and our fixed charge coverage ratio was 2.3 times. When excluding the impact of the FIN 46 consolidation, Omega's total adjusted debt to adjusted EBITDA was 4.3 times. And when you pro forma in the Litchfield transaction, our leverage was just under 5 times. I will now turn the call over to Dan Booth, our Chief Operating Officer.

Thanks Bob, and good morning everyone. As of June 30, 2006, Omega had a core asset portfolio of 208 facilities distributed amongst 34 third-party operators located in 27 states. Operator coverage ratios remained very strong during the first quarter of 2006.

Trailing 12 months, EBITDARM coverage for the period ended 3/31/06 was two times versus two times for the period ended 12/31/05. Trailing 12 months, EBITDAR coverage was 1.6 times as of March 31st versus 1.5 times as of 12/31/05.

During the second quarter, Omega had a $10 million mortgage loan pay-off. The Company had previously held mortgages on 15 facilities in Indiana representing 619 beds. The facilities were quite small in size and considerably older than the portfolio average. In addition, the state of Indiana is not one of Omega's target markets.

Subsequent to the second quarter, Omega closed on a $171 million new investment effective August 1, 2006. The transaction referred to as the Litchfield transaction involved 31 facilities in 5 states with a total of 3,847 beds. The states are Florida, Colorado, Texas, Louisiana, and Idaho, all states where Omega currently owns facilities.

The facilities are currently leased to three operators who are current tenants of Omega, including HQM, Nexion, and Sun. The initial annual rent will be $17.1 million. The purchase price represents an average price per bed of just over $44,000. The consolidated projected EBITDARM and the EBITDAR coverage ratios were 1.8 and 1.3 times respectively.

It is likely that at the 31 facilities acquired, Omega will allow two to three buildings to be closed or sold in the near future. Looking at Omega's portfolio today, we have 239 facilities with 27,000 beds located in 27 states. Our gross investments have reached nearly $1.3 billion.

As far as operator composition post the Litchfield transaction, Sun will remain our largest operator representing 18.7% of Omega's revenues. HQM will become our fifth largest tenant representing 7.2% of revenue, and Nexion will become our seventh largest tenant representing 6.4% of revenue.

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

Thank you. [OPERATOR INSTRUCTIONS]. Your first question comes from Charlie Place with Ferris, Baker Watts, please proceed, sir.

Good morning.

Hey, Charlie.

Real quickly on the restricted stock expense that you may achieve the accelerating -- you indicated additional $4 million of expenses, would that be all booked in the third quarter, would that be evenly spaced in the third and fourth?

The catch-up would all be booked in the fourth -- the third quarter. And then there may be some amortization in the fourth quarter and perhaps the first quarter of next year, assuming the third quarter is the triggering period of time.

Is it safe to assume that you would also maintain around roughly $300,000 a quarter or would this eliminate that? Looking at your guidance, it looks like you're maintaining at $300,000 a quarter --

We would still maintain that for 2007.

I'm sorry, you would?

Yes, we would.

Okay. On the -- secondly on your acquisition pipeline, I was hoping that maybe you could, expand beyond the Litchfield that you've announced is -- when you look out at 2007 in your estimates, are you factoring in any kind of assumed acquisition volume?

We typically don't assume acquisition levels in our guidance, although you'll note the range $1.21 to $1.26 is fairly wide. We got some stuff in the pipeline that I would consider normal. You know, what we have seen over the past couple of years, timing is pretty much unknown, and so we just don't provide guidance on acquisitions.

Okay. The -- just one last thing here. Can you comment a little bit about the regulatory environment as -- you know, looking forward for your operators, is there any legislation or anything that you've heard out there that, you know -- any potential risk factors that need to be highlighted?

I think in terms of risk factors, it's very quiet and we feel, in general, the regulatory environment is favorable. We're starting to see the rate increases and thoughts about where rates are going to come in, and I think in general, the outlook's favorable.

Thank you, that’s it.

Thanks Charlie.

And your next question comes from Jerry Doctrow with Stifel Nicolaus, please proceed, sir.

Good morning. The -- I just wanted to -- just get a little more color on acquisition environment. You know, as we look back I think on Litchfield, the cost price per bed there is good, yield is good, coverages are very good. I think we've seen on some deals recently. I don't know if you think that's sort of typical, but where would you think kind of pricing is going on the skilled space?

Well, I think like -- as we've seen in other parts of the senior housing industry, pricing has gotten tighter and cap rates have gone down and we -- all of the transactions we've done lately have been relationship driven, and fortunately, we have plenty of relationships. But I think in straight bid scenarios, you're going to -- you're seeing continued pressure on pricing.

Do you think that -- just like on yields is that -- we're playing in like a 9 to 10% range still on skilled or is it getting more aggressive than that do you think?

I think for medium to large size skilled [deals] 9 to 10 is the range, and as the deals become a little bit smaller, you push up towards the higher end and the larger deals push way down towards the lower.

Okay, and Taylor or Dan, whoever, as you kind of underwrite, I just want to get sort of a little feel, if I could, for sort of what's most important to you, is it coverage, is it price per bed, is it yield. How do you kind of try to evaluate that, that kind of risk-reward sort of trade off?

And again, I think you've done fairly conservative deals, I'm trying to actually get may be a little context to think about the rest of the market.

If I'm seeing $70,000 per price beds or $80,000 per bed prices, should that be making alarm bells. What's -- how do you think about those issues?

Well, I'm -- we look at all the things that you just mentioned. I think actually the first thing that we look at is probably our confidence in the operators themselves.

Okay.

Because most of the deals that we do have been add-ons to existing relationships. And fortunately, the deals that we've done have all sort of fallen in our range, the kind of the 120, the 125 coverage. But that's also being supplemented by the fact that we're generally adding those acquisitions into existing master leases, where the coverage is generally way higher than that.

So it's even -- it's quite enhanced, if you will, by the fact that we're sort of doing these add-on deals with existing operators. But beyond that, obviously, there are certain states that we'd like to do business in, certain that we probably won't do deals in anymore; coverages is clearly important.

The price per bed, it's going to vary a lot by geographic location and age of the buildings. We -- Omega has paid up into those higher ranges in previous deals in the New England area, because quite frankly, that's what facilities are going for, these being more in that sort of a south, southeast or you know, it's more in the 40s per bed, which is kind of what we see. So it's really a combination of all those factors.

Okay, that's helpful, thanks.

Thanks, Jerry.

[OPERATOR INSTRUCTIONS]. Your next question comes from Kristin Brown with Deutsche Bank. Please proceed.

Good morning. I just wanted to ask you if you could talk about any of the assumptions underlying your increased guidance in your '07 guidance.

Well, the increased guidance is, the assumptions are pretty straightforward in the sense that we've now got a couple of quarters completed, and with Litchfield, obviously, we'll do a little bit -- we expect to do a little bit better in the third and fourth quarter than we did this quarter. So that's just kind of straightforward math.

And then going into the next year, there are no assumptions other than the Litchfield deal as part of the portfolio, and our normal increases for the low end of the guidance range.

Okay. Thanks.

[Technical difficulty]

Mr. Pickett, as there are no further questions in queue, I'll turn the call back over to you for any closing remarks.

Thank you, Sam. Well, thank you for joining our second quarter conference call. Bob Stephenson, our CFO will be available for any follow-up questions you may have.

Thank you ladies and gentlemen for your participation in today's conference. This concludes the presentation. You may all now disconnect. Have a great day.