Omega Healthcare Investors Inc (OHI) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2007 Omega Healthcare Investors Incorporated earnings conference call. My name is Gina, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Tom Peterson. 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, which identify a specific factor 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, adjusted FFO, and EBITDA. 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 Web site, and in the case of FFO and adjusted FFO, in our press release issued today.

I will now turn the call over to our CEO, Taylor Pickett.

Thanks, Tom, and good morning.

I will review our adjusted second-quarter 2007 FFO, our 2007 adjusted FFO guidance, the recently completed senior management employment agreements, and our current cash availability and leverage.

Adjusted FFO for the second quarter is $0.34 per share. The primary FFO adjustment is the add-back for the expense related to restricted stock grants, which increases reported FFO by less than $0.01 per share.

Turning to 2007 adjusted FFO guidance, we're maintaining our 2007 adjusted FFO guidance of $1.32 to $1.36 per diluted share. Our second-quarter results are slightly better than we had anticipated. Based on our six-month results, we will likely be at the upper end of our guidance.

As we've previously reported, in May 2007, five senior executives signed employment agreements extending their employment through December 31, 2010. As part of the new employment agreements, the executives were granted performance restricted stock units that generally vest if the Company achieves total annual and cumulative shareholder returns of 11% per year.

With cash availability of $232 million and debt-to-EBITDA of only 3.7 times, Omega has a tremendous amount of financial flexibility. Our operators continue to perform well and have been an excellent source of new deal flow. We believe we are well-positioned to continue to execute our growth strategy over the next several years.

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 $22.4 million or $0.33 per share for the quarter, as compared to $22.7 million or $0.39 per diluted share in the second quarter of 2006. As Taylor described, our adjusted FFO was $22.6 million or $0.34 per share for the quarter, which excludes non-cash restricted stock compensation expense of approximately $300,000 and FIN 46 consolidation adjustments. Further information regarding the calculation of FFO is included in our earnings release and on our Web site.

Operating revenue for the quarter was $38.2 million versus $32.3 million for the second quarter of 2006. The $5.8 million increase was primarily a result of $196 million of new investments made in the third quarter of 2006.

Operating expense for the quarter was $11.6 million, as compared to $9.8 million for the second quarter of 2006. The $1.8 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 $10.1 million. The growth in interest expense reflects acquisitions made during 2006.

Turning to the balance sheet, at June 30, 2007, we had approximately $1.2 billion of total assets. At June 30, 2007 we had credit facility availability of $223 million. On April 3, 2007, we completed a 7.1 million common share offering, generating net proceeds of approximately $113 million.

During the quarter, we sold two facilities, previously classified as held-for-sale, for their approximate net book value, generating cash proceeds of approximately $1.8 million. As of today, we have combined cash and credit facility availability of approximately $232 million.

On the liability side of the balance sheet, we had $556 million of debt at June 30, 2007.

For the three months ended June 30, 2007, our total debt-to-EBITDA was 3.9 times and our fixed-charge coverage ratio was 2.7 times. When you exclude the $300,000 of non-cash restricted stock compensation expense, our total adjusted debt to adjusted EBITDA is approximately 3.7 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, 2007, Omega had a core asset portfolio of 233 facilities distributed among 30 third-party operators located within 27 states.

Operator coverage ratios remained very strong during the first quarter of 2007. Trailing 12 months EBITDARM coverage for the period ended 3-31-07 was 2.1 times versus 2.1 times for the period ended December 31, 2006. Trailing 12-month EBITDAR coverage was 1.7 times as of March 31, versus 1.7 times as of December 31, '06.

Turning to new investments, Omega continues to identify and develop new investment opportunities, virtually all of which are in the skilled nursing sector. Our pipeline continues to be active, however somewhat choppy.

As noted earlier, as of today, Omega has $232 million in cash and present availability to fund potential new investments.

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

(OPERATOR INSTRUCTIONS). Jerry Doctrow, Stifel Nicolaus.

Good morning. I had a couple of things. I guess, first, just the IRS settlement that you were pursuing, can you just kind of tell us the status of that?

Yes. Our understanding, via the lawyers are handling it, is that we are on track. We had thought that the IRS would be finished with the issue a month or two ago, but apparently it's just a backlog within the IRS office. Our expectation is we will receive something shortly. We have no indication it will be anything different than our expectation and we will issue a press release when it comes out.

Remind me how much you had sort of set aside for that and sort of where we stand with some of the financials?

Yes, we have about $5.6 million that's already been booked. It's a liability on our balance sheet, Jerry.

Thanks. Then I wanted to just talk a little bit more about pipeline, and maybe even actually starting before that with just coverage. I mean, Dan talked about coverage being very solid. I was just wondering if you can give us any more color as to what you are seeing out there among operators, maybe particularly touching on Advocat or any of the other big ones that you've got.

Jerry, I mean, if you look at our top ten operators, I mean the coverage for all of them is just very strong. It's as strong as it has ever been since we've all been at the Company, and it's just continued to be very stable. It's actually it's sort of been trickling up a little bit, but across the board within our top ten operators, you've got coverages that really mirror the overall portfolio, over two times EBITDARM and about 1.7 EBITDAR.

I will comment briefly on Advocat. I know their stock price has moved around a bit, but from an operations perspective, our portfolio has performed very well. The coverages have been strong with respect to Advocat, as Dan mentioned, with all of our operators.

Then just in terms of a pipeline out there, I mean the couple of things that -- you indicated I guess the pipeline is I think substantial but choppy, or something like that. Again, if we could get a little bit more color? My sense is we've had some big buyouts in this space -- Manor Care, Genesis; the credit markets seem to be a little unsettled. Just any more color we can get on kind of a pipeline. Is it still skilled nursing? I think you said that's still covering existing operators. But any better color than what you've provided?

The only comment I would make there is the stuff that we're looking at ranges from $10 million to $40 million. It's all with current operators.

We've got a couple of things that are real active, that look promising, but it's not as -- there's not as much going on as there was a year and a half ago. But I think that's just the choppiness we've consistently seen, and we've been able to find deals. So I feel pretty good about not only the prospects for sourcing deals over the next 12 months, but our financial position and the flexibility to do things.

Okay. Then just a last thing and then I will get off -- just in terms of competition, you know, are you seeing much of anything from the other REITs out there? Is it people looking to bank financing? When they're coming to you with a deal, who do you see yourselves competing against these days?

You know, there's still a couple of REITs that play in the skilled nursing home sector. But then there's a couple of financial institutions that are also -- that we've seen a little bit lately -- the CITs and [Cap Sources] of the world. But our competition I think overall in the skilled sector is fairly limited.

CIT and Capitol Source have not become more aggressive? I mean both of them are I guess legally now have REIT structures?

You know, we've only seen them modestly, so I'm not sure where they are going in the future. But to the extent we've seen them, they haven't done anything crazy.

Okay, great. Thanks, guys.

[Tao Okasaya], UBS.

Good morning, gentlemen. Just two quick questions -- first of all, I just wanted to get a sense in regards to the acquisitions market at this point, what you have seen in regards to cap rates for your asset classes.

You know, the cap rates are, well, if you look at our cash-on-cash yields, it's hovering around 10. You know, there's nothing in the (inaudible) 10%. We are still hovering in the 10% range in terms of cash-on-cash yields.

I think there's, over the last six months or so, there's been some pressure there, but I have a sense that we may see that pressure diminish a bit with where the debt markets are headed.

Then the second thing, in regards to the financials and the decline in the revenues, or the apparent decline in revenues second quarter versus first quarter, I know that has to do (inaudible) with Advocat and the restructuring. Could you kind of just walk me through that again?

Yes. In the first quarter, Advocat, one of our operators, was not on straight-line accounting from a revenue standpoint. And they weren't because they had an accounting-going-concern opinion. Part of our policy is, if somebody has an opinion like that, then we do not straight-line their rent. That was removed at year-end, but after we reported our first-quarter earnings, or after our year-end earnings. So during the first quarter, we had a cumulative catch-up and put them back on straight-line, and that was around $5 million.

Just to be clear, so if you pull the out of the first quarter, the revenues are pretty consistent, quarter-to-quarter and so is the adjusted FFO, because we obviously didn't leave that $5 million of revenue in our adjusted first-quarter FFO.

Very helpful. Thank you very much.

Charles Place, Ferris Baker Watts.

Good morning. Just a follow-up to the previous question -- when you said that you were seeing some pressure in the last six months on cap rates, was that pressure to -- for the cap rates to go down?

Yes.

Okay, so you think that's easing a little bit, given where the debt markets are (inaudible) --?

I think it may -- you know, it's a little bit early to -- but I wouldn't be surprised if we see that ease a bit over the next six months.

Okay. Secondly, I wanted to ask about the G&A run-rate. Obviously, the second quarter was better than the first. I would assume that the first had some additional expenses in there tied with the restatements and other things that you were doing from -- in '06. You had mentioned, in your comments, Taylor, about the management incentive, about return hurdles. Do you expect that to kind of provide -- if you hit those hurdles -- to add to G&A expenses in the fourth quarter?

No. In fact, all of the incentives are via the restricted stock awards that we have, and so that's where you will see any expense related to that.

Charlie, you'll see. We have a separate line item on the press release for the restricted stock expense (multiple speakers).

Right. It's 309 this quarter--?

Yes, and that's not a full quarter, so just trying it for modeling purposes, you guys will be modeling that out. It will probably be in the 500,000 range for the '07 and '08, per quarter. So that should help you in your modeling side.

Okay, and that's -- so that new program is through 2008?

Through 2010. But then after 2008, the expense goes down slightly.

Okay. Can you just refresh my memory again about the lease inducement with Guardian that you mentioned in many of your tables in the supplement that you put out there? What occurred there for that $19 million lease induce (inaudible) do you count it as an investment?

We had ownership in a property, and the operator had a purchase option that they had indicated they were going to exercise. So they had turned -- the property is a combination of skilled nursing facility and rehab hospital that they bought when it was very troubled. They did a phenomenal job of turning it around, where it produced very substantial cash flows. The value increased enormously, so they were going to exercise the purchase option and go refinance the facility, take a bunch of money off the table. We said, well, guys, we would like to be -- we would like to finance that, which we did.

Unfortunately, the way the accounting rules work, rather than just being a normal investment with a normal rent return, which is what it is from a business perspective, for accounting purposes, the asset is booked as a "lease inducement" and is amortized over the life of the lease, as opposed to being up in our investments as a normal fixed asset and being depreciated.

Where does that show on the balance sheet then? Is that in your other investments? No.

The 19.2 is in AR.

Oh, okay. Excellent. Then just circling back real quickly for the coverage ratios, were those second-quarter and first-quarter comparisons, or -- I wasn't too sure what the timeframe --.

They were trailing 12 months actually, comparing the first quarter to -- or the trailing 12 months ending March 1 to the trailing 12 months ending December.

Do you not have through June?

No, we don't. Most of the operators report within 30 to 45 days of month-end (multiple speakers) get their statements in a couple of weeks.

Okay. That's all the questions I had. Thank you.

Mike [Mackoney], Bishop Rosen.

Okay, I have to ask this. I got in this morning and we were all cranked up on Omega Health and the stock opened at 12? Taylor, I mean, did you have a medical emergency this morning or something? (LAUGHTER). You know, help us out. I mean, I almost had a medical emergency!

We do know, you know, obviously Bob and his folks did a little work.

Good!

(LAUGHTER). There was one -- there was a 20,000 ---.

Cardiac arresting. Go ahead.

There's a 20,000 share trade that came through the UBS desk I think first thing --.

On the opening.

On the opening, then I think -- I haven't looked but I've heard that it sort bounced back to something more realistic.

I'm happy to report it has (LAUGHTER) otherwise I would be at the emergency room. Okay, so you are just saying it was (inaudible). I mean, when I looked at the numbers, was wondering if somebody simply, you know, looked at the thing. You know, this adjustment for the Advocat, it looks as if there was some negative trend, unless you knew about the Advocat thing.

That's possible.

My guess was maybe that was it. I mean, I guess that's it. My instinct is that there's been some pressure as funds that are invested in real estate generally are under -- being redemptions that are -- or being probably forced to sell healthcare REITs, because they are all doing poorly.

That's true.

I mean, we talked about that the other day. I mean, this is a nonoperating issue, but I mean it's a little weird for the stock. Taylor, you are in good health?

I'm in good health! (LAUGHTER)

All right. Well, I had to ask because I wasn't in good health earlier. All right, guys. That looks good. Thanks a lot.

(OPERATOR INSTRUCTIONS). There are no other questions in queue. I'd like to turn the call back to Taylor Pickett for any closing remarks.

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

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