Omega Healthcare Investors Inc (OHI) 2006 Q4 法說會逐字稿

Welcome to the fourth quarter 2006 Omega Healthcare Investors, Inc. earnings conference call. [OPERATOR INSTRUCTIONS] At this time, I'd like to turn the call for your host for today 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 including 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 A 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 principals, as well as an explanation of the usefulness of the non-GAAP measures are included in our press release issued last night 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 our CEO, Taylor Pickett.

Thanks, Tom. I'll review our fourth quarter and full year 2006 FFO and our 2007 adjusted FFO guidance. In addition I'll provide a status update regarding our previously-disclosed REIT tax obligation and I will provide a brief recap of the last three years.

Adjusted FFO. Adjusted FFO for the fourth quarter is the same as reported FFO of $0.32 per share. The FFO adjustments, which basically net to zero, primarily consist of items related to restatement professional expenses and fourth quarter entries related to the restatement. Adjusted FFO for the full 2006 year was $1.24.

Turning to 2007 adjusted FFO guidance. Our 2007 adjusted FFO guidance is a range of $1.32 to $1.36 per diluted share. It is likely that our reported FFO will be somewhat greater than our adjusted FFO, assuming Advocat, our third-largest operator receives an unqualified audit opinion for their 2006 financial statements. In the past, Advocat has received a qualified going concert opinion and, therefore, Advocat rent has essentially been reported on a cash basis for Omega's accounting purposes. If Advocat does receive an unqualified opinion, then approximately $5 million of previously unrecognized straight-line rent revenue will be recorded by Omega as FFO in the first quarter of 2007.

Moving to our REIT tax obligation, as part of the Advocat restructuring and as previously described in detail, we've been working with the IRS and our tax council to resolve any potential REIT tax issues via a closing agreement and tax payment. Our tax attorney has had conversations with the IRS personnel handling the case and the IRS has indicated that our case is appropriate for a closing agreement. Based on feedback to date, our sense is that we should be able to resolve our issues within two to three months. It is very likely that will be required to pay the full penalty plus interest, which is projected at $5.6 million and was previously accrued.

Lastly, I'd like to recap our results over the last three years. Omega's acquisition activity and dividend growth over the last three years has affirmed our strategy to acquire skilled nursing facilities at 10% cash-on-cash returns, funded with approximately 50% equity. At $1.2 billion in gross real estate assets and projected revenue of just under $150 million, Omega continues to be in a position to grow meaningfully with relatively modest acquisition activity. In 2004, we closed $121 million in new investments. In 2005, we closed $314 million and in 2006, we closed $196 million. These deals, totaling over $600 million in acquisitions, in conjunction with contractual escalators, allowed us to increase dividends from $0.75 in 2004 to $0.88 in 2005 and $0.98 in 2006. This is a 31% increase over two years.

Furthermore, we have continue to grow adjusted FFO from $1.11 in 2005 to $1.24 in 2006, a 12% increase. We look forward to continuing to execute our business model and deliver significant shareholder returns. 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, was $19.2 million, or $0.32 per share, for the quarter as compared to $13.2 million or $0.24 per diluted share in the fourth quarter of 2005. As Taylor described, our adjusted FFO is $19.4 million or $0.32 per share for the quarter, which excludes the effect of the Advocat restatement items and related restatement expenses, non-cash provisions for impairments, and uncollectable accounts receivable and non-cash restricted stock expense. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter was $36.2 million versus $28.4 million for the fourth quarter of 2005. The $7.8 million increase was primarily a result of approximately $196 million of new investments made since the fourth quarter of 2005, partially offset by reduction in mortgage interest income from a $10 million mortgage payoff that occurred in June of 2006. Operating expenses, when excluding the $1.2 million in professional fees related to the restatement and $300,000 of restricted stock expense, were in line with last year. Increases in depreciation and amortization expense and interest expense reflect acquisitions made during 2005 and 2006.

As was noted in our press release issued last night, the Advocat-related restatement entries affecting the income statement are reflected in the following income line items for the three months ended December 31st, 2006. $125,000 of non-cash accretion-related revenue is included in other investment income. $3.5 million gain on the Advocat Securities made up of the fair value of the secured convertible subordinated note of $2.5 million and a gain of $1.1 million when investments previously classified as other comprehensive income, $593,000 reduction in income is included in the change and fair value of derivatives and, lastly, $608,000 of expense is included in provision for income taxes.

Turning to the balance sheet, year-to-date total assets increased approximately $139 million versus December 31, 2005. The increase is primarily due to 2006 acquisitions. At December 31, 2006, we had credit facility availability $48 million. As of today, we have combined cash and credit facility availability of approximately $55 million. On the liability side of the balance sheet, we had $676 million of debt at December 31, 2006.

For the three months ended December 31st, 2006, Omega's total debt-to-EBITDA was slightly under five times and our fixed charge coverage ratio was 2.3 times. When excluding the impact of the fin-46 consolidation and adjusting for certain one-time items, such as Advocat and restatement-related income and expense numbers, Omega's total adjusted debt to adjusted EBITDA was 4.8 times. I'll turn the call over to Dan Booth, our Chief Operating Officer.

Good morning. As of December 31, 2006, Omega had a core asset portfolio of 233 facilities, distributed amongst 32 third-party operators located in 27 states. Operator coverage ratios remain very strong during the third quarter of 2006. Trailing 12-month EBITDA coverage for the period ended 9-30-06 was 2.1 times versus 2 times for the period ended 6-30-06. Trailing 12- month EBITDA coverage was 1.6 times as of September 30th versus 1.6 times as of June 30. Although it is difficult to predict with any certainty future coverage ratios, it should be noted that the current reimbursement outlook both on the federal and state levels appears to be very stable for the next 12 to 24 months.

Turning to new investments, Omega continues to identify and develop new investments, virtually all of which are in the skilled nursings sector. Our pipeline continues to be fairly active, however, somewhat choppy, which is the same market we have seen over the last three years. As of today, Omega currently has $55 million of cash and credit availability to fund potential new investments. In addition, Omega is currently in the process of expanding its current credit facility from $200 to $250 million.

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

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Charles Place of Ferris, Baker Watts. Please proceed, sir.

Good morning.

Good morning, Charles.

Can you comment about the potential for additional restricted stock grants, heading into 2007 and going forward? Is that something that's going to be addressed at the annual meeting or how should we look at that?

Well, as you know, the restricted stock grants involve vested, both the ones from '04. The Compensation Committee of the Board of Directors has been in discussions and are working through what, if any, structure we'll have going forward. So I don't think -- I don't know that it's an annual meeting type thing. It's probably sooner. I know they're working through that now.

Okay.

But I don't have -- I can't give you any guidance on the month.

All righty, thank you. That pretty much addresses my questions. You hit the other ones during your commentary, thank you.

Great, thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Jerry Doctrow of Stifel, Nicolaus. Please proceed, sir.

HI. This is actually Dan Bernstein filling in for Jerry.

Hey, Dan.

How are you?

Good.

I've got a couple questions. I was hoping you might be able to talk about the general investment environment, specifically talking about what yield assumptions you're thinking about and what you're seeing out there?

I'll start with the general and I'll let Dan maybe address some of the more specifics. In general, we're still seeing deals. We've seen some of the very large transactions, which obviously we're not participating in. We're still seeing some of those middle-level, $20 to $40 million type deals floating around. From a yield perspective, we're still looking at 10% cash-on-cash. And, Dan, maybe you can address sort of a leveraging off of our current operator pool.

Yes, I think for the most part, that continues to be where our deal flow is coming from. It's operators who have otherwise located deals in the market, would be up there, competitors who are selling out or new markets that they might be entering that they've been bringing us. And a little bit vice versa. We uncover deals from time-to-time and generally the first thing we do is then bring it to the operators that operate in those markets. But I think, for the most part, we're dealing with our existing core group of tenants.

Okay. You raised the dividend to $0.26 a quarter. I'm just trying to get a flavor for what -- just based on a dividend policy of some percentage of FFO or FAD and how should I think about that going through '07 and maybe --

We've stayed in the range that we've talked about, 80% to 85% of adjusted FFO, and I would expect us to stay within that range with the straight-line income and that accounting adjustment. Our adjusted FFO's is about $0.05 more than our FAB; is that correct, Bob?

That's correct.

So we've had a tiny bit more a spread than we've had in the past between adjusted FFO and FAB. Although, as time goes on, that'll close back down again. So I would say that's pretty safe range -- 80% to 85% of adjusted FFO, maybe towards the slightly lower end of that range, 'cause FAB's a little less.

Okay. And the last question I had is if I pull out the $1.2 million in legal expenses and G&A, you're coming out about $1.9 million run rate per quarter. Does that sound good for '07?

It's going to be a little higher than that just from the normal CPI inflators that hit G&A.

We've been in the $2 million --

We've been averaging in the 2 range, though.

$2 million?

Yes.

I might have a few more questions, but we can talk offline.

Thanks, Dan.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of [Vomon Kamali] of Credit Suisse. Please proceed, sir.

Thank you for taking my call. You mentioned that you have been focusing on acquisitions that yield you a 10% cash-on-cash and you also said that those were financed at 50% equity. If I'm not mistaken, I believe those were through your revolver, so are there plans to issue some equity to pay that down or how are you going to work that revolver back down to lower levels?

Just to be clear, I was talking about over -- if you look at the three-year term and you look at the level of acquisitions and the amount of equity that we've issued --

Uh-huh.

-- it equates to basically 50% equity over time. If you look at where we sit today, our adjusted debt-to-EBITDA is 4.8 times, which is within our stated range of 4 to 5 times. So, we've been pretty consistent of staying in that range of 4 to 5 times. So we've got some room for increasing the revolver by $50 million so that we have additional availability on the line. And, as appropriate, based on deal flow and market value, we will go back to the equity market as we have in the past, but we really look at that metric, adjusted debt-to-EBITDA in that range so we're 4.8 so we're in the range. Really it's going to depends on deal flow.

Are you comfortable with that [inaudible] on the revolver or are you more inclined to term that out with bonds - are you more inclined to use equity or debt to term out the revolver?

It's going to depend on the market when we get to that point in time what our deal flow looks like, whether it's equity or bonds, we'll make that decision as we have in the past at that point in time. Yet, there are times when we'll go do equity and then come back with bonds. And there are times if you look in the last three years, we've done exactly the opposite -- we've gone to bonds and then gone to the equity market. So to answer that question as I sit here today, I couldn't tell you.

Okay. Thank you.

There are no more questions at this time. I'd now like to turn call back over to Mr. Taylor Pickett. Please proceed, sir.

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

This concludes today's presentation. You may now disconnect.