Omega Healthcare Investors Inc (OHI) 2007 Q1 法說會逐字稿

Good day ladies and gentleman and welcome to the Omega Healthcare Investors First Quarter 2007 Earnings Conference Call. My name is [Onika] and I'll be your operator for today. At this time all systems are in a listen only mode. We will conduct a question and answer session toward the end of this conference. (Operator instructions). As a reminder this conference is being recorded for replay purposes. At this time, I would now like to turn a call over to 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 for 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 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 today 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 our CEO, Taylor Pickett.

Thanks, Tom and good morning. I will review our adjusted first quarter 2007 FFO and our 2007 adjusted FFO guidance. In addition I'll comment on our recently completed equity offering.

Adjusted FFO. Adjusted FFO for the first quarter is $0.34 per share. The primary FFO adjustment reduces reported FFO of $0.42 per share, down to $0.34 of adjusted FFO. The adjustment relates to straight line rent income from Advocat, which was recorded in the first quarter as a result of Advocat's improved financial strength.

Turning to 2007 adjusted FFO guidance. We are maintaining our 2007 adjusted FFO guidance of $1.32 to $1.36 per diluted share. Based on our first quarter results, and the modest solution from our recently completed equity offering, we expect quarterly FFO of approximately $0.33 per share for the remainder of the year.

Turning to the equity offering. On April 3rd, 2007 we completed a 7.1 million share offering netting $113 million in proceeds. Post offering, we have $219 million available on our revolving line of credit. In addition, with debt to EBITDA now under four times, we can close approximately $300 million in new transactions using debt before we reach five times debt to EBITDA. Bob Stephenson our Chief Financial Officer will now review our first quarter financial results.

Thank you, Taylor. Good morning. Our reportable FFO on a diluted basis was $25.4 million or $0.42 per share for the quarter as compared to $15.5 million or $0.27 per diluted share in the first quarter of 2006. As Taylor described, our adjusted FFO is $20.3 million or $0.34 per share for the quarter, which excludes the effect of an adjustment to the allowance for Advocat straight line rent resulting in an increase in revenue of $5 million for the quarter 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 $42.7 million versus $32.1 million for the first quarter of 2006. The $10.6 million increase was primarily a result of $196 million of new investments made in the third quarter of 2006 and the Advocat revenue of allowance adjustment. Operating expense for the quarter was $11.4 million compared to $9.8 million for the first quarter of 2006. The $1.5 million increase was primarily due to $1.3 million of increased depreciation and amortization expense resulting from our 2006 acquisitions. Interest expense for the quarter was $11.8 million and the growth and interest expense reflects acquisitions made during 2006 coupled with an increase in LIFA rates.

Turning to the balance sheet, at March 31st, 2007, we had approximately $1.2 billion of total assets. At March 31st, 2007, we had credit facility availability of $106 million. As Taylor mentioned earlier, on April 3rd we completed a 7.1 million common share offering generating net proceeds of approximately $113 million. As a result, today we have combined cash and credit facility availability of approximately $219 million.

On the liability side of the balance sheet, we have $673 million of debt at March 31, 2007 and today we have approximately $516 million of debt on our balance sheet. For three months ended March 31, 2007, Omega's total debt to EBITDA was 4.2 times and our fixed charge coverage ratio was 2.7 times. When you pro forma the proceeds from equity offering Omega's total pro forma debt to EBITDA is approximately 3.5 times. I'll now turn the call over to Dan Booth, our Chief Operating Officer.

Thanks, Bob and good morning. As of March 31st, 2007 Omega had a core asset portfolio of 233 facilities distributed amongst 31 third party operators located within 27 States. Operator coverage ratios remained very strong during the first quarter of 2006.

Currently 12 month EBITDA coverage for the period ended 12 31 06 was 2.1 times versus two times for the period ended 9 30 06. Trailing 12 month EBITDA coverage was 1.7 times as of 12 31 06 versus 1.6 times as of 9 30 06. As noted on our last call, the current reimbursement outlet both on the federal and state levels continues to appear very stable for the next 12 to 24 months.

Turning to new investments. Omega continues to identify and develop new investment opportunities virtually all of which are in the skilled nursing home sector. Our pipeline continues to be active; however, somewhat choppy. Market conditions have compressed capitalization rates and it is becoming increasingly possible that Omega will have to begin making new investments which have initial cash yields under 10%. As of today, Omega has $219 million in cash and credit availability to fund potential new investments.

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

Thank you. (Operator instructions). Your first question comes from the line of Charlie Place with Ferris Baker Watts. Please proceed, sir.

Good morning. Can you touch upon on what we should look for for your stock compensation expense going forward? It was relatively modest in the first quarter. Is that the appropriate rate going forward or should it be closer to what was historically?

I think for modeling purposes I would look at what has been historically. The Compensation Committee of the Board of Directors has had a number of meetings and has communicated with management and there is a process going on now in which restricted stock would be part of ongoing employment agreements. Because that has not been finalized, I can't really give you guidance on where that would fall. As it stands now, that would be a part of our ongoing package.

Okay. Secondly, you mentioned in your press release that you've reinstated the dividend reinvestment and common stock purchase plan. How should we look at that on kind of a quarterly basis going forward?

Charlie, we reinstated it effective with the 15th it's effective now with the proceeds on the 15th. I think from a modeling standpoint it's going to ramp up. It's hard to predict exactly what it will be. As you remember last year it was pretty substantial. Where did we finish up, Bob?

$6 million a quarter.

We're running in the $6 to $7 million a quarter. Or $6 to $8 million a quarter range. As a barometer, Charlie, you can use that but since we don't know how fast to ramp up, that's just a gauge.

Thanks. And last question. You had an asset held for sale of $773,000 at the end of the quarter. Is that an operating facility?

There's two facilities there Charlie that will believe will be sold at the net book value.

I saw that mentioned. I thought maybe those had already closed.

That will not affect our earnings.

That's it for me. Thanks.

Thanks, Charlie.

(Operator instructions). Your next question comes in the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

Good morning. I want to just open with some of some broader perspectives on the industry. Obviously, there's a lot going on with the Genesis takeover battle and Manicare now having retained an adviser. You've been through some of these twists and turns before. Do you think things at the top are people starting to overpay? Just your perspective on kind of where we are from the overall industry perspective in kind of a capital chasing.

I think you're seeing capital obviously its moved into the sector of the last couple years with public companies going private and now you're looking at some of the highest quality companies going private. My view is that the equity money, "smart money", looking at the reimbursement environment as having very little risk, supply having very little risk in competition and opportunities particularly these very well run companies for growth. I think it's really just a function of those things coming together. If the prices seem high, but I'm sure on a pro forma basis with the expectations for growth that they are going to able to achieve the returns they're looking for.

One of the things that we've been thinking about here, obviously, you talked about pressure on some of your yields on new stuff. Any implications for the buyouts that Genesis or Manicare in your minds that are pushing down cap rates or maybe those private equities are looking more attractive if effective cap rates are coming down.

You wonder about that. Obviously, people are buying big platforms. But the extent that you can attach other assets. You might see some of that. We haven't. That would be a natural progression to look at.

Okay. Then just a couple, maybe more specific things. On your portfolio, where would your current coverage's be? Dan had talked about EBITDA at 1.7/1.6. EBITDA at 2.1, I think. If you're doing the deal today, is it 1.4 is it 1.2? Where does that come in your underwriting?

We have historically looked at a minimum of 125. Most of our deals actually have penciled out a little bit higher than that.

Okay.

130 to 140 range.

Okay. That's not being pressured, but it's mostly the rates or both things being pressured in this market?

I think you're getting pressure along proceeds and rate.

Okay.

And obviously proceeds drive coverage and rate is just another function of that.

When you're doing your underwriting and you're 130 and stuff, how do you think about CapEx? You're sort of allowing enough within that cushion to cover CapEx as well? It's less of an issue if you have an operator that has multiple facilities?

We look at it it really depends on the portfolio facility. Generally an underwriting of our lease, we require an annual CapEx of somewhere between 350 and 450 per bed per annum. There are higher quality facilities that may be need a lower end. There are some other portfolios that would need that or more.

Okay. That's just built in.

We have to look at each portfolio.

I guess I want to get a little more color on acquisition. You touched on the fact that the pipeline is sort of active, but lumpy. I'm kind of assuming with some of the other things you said on obviously doing the equity issue and Taylor I think you indicated you could conceivably go 300; Dan was saying you have $200 million right on the balance sheet. Ready access to $200 million plus to do a deal. There are some of those larger transactions out there. Can you give me a little color on what kind of potential deals are there, whether they happen or not?

there are three private medium sized deals on the market that we're aware of and there probably more that pencil out between $100 million and $250 million. You have folks looking at monetizing in different ways. These are all different portfolios. None of those are that far along in terms of their process. That's just something that's out there.

In terms of stuff that's starting in our pipeline, it's kind of our typical $10 to $50 million size. We have a couple of those bouncing around in the early stages of the pipeline. We feel like we put ourselves in a position to play in either set. Sort of our traditional with our current operators and stuff that's in the pipeline, but some of the other transactions that have been put out in the market that is somewhat bigger size.

The rationale for doing the equity is to give yourself the flexibility to do the bigger deal?

that and we were pushing toward our stated leverage target. We've stayed under five consistently. We're pushing into the high four's. Now we're sub four which gives us that much more.

Most of these are kind of consolidation transactions where an operator basically is cashing out selling to another operator and refinancing when they come to play.

It's a little of both. There are some sale transactions out there as well with the new operators.

Okay. I think that's all for me. Thanks guys.

Thanks, Jerry.

(Technical difficulties).

I think our moderator cut out. I assume we don't have anymore questions. If there are any additional questions, please feel free to contact Bob Stephenson, our CFO. Thank you for joining our call today.