Omega Healthcare Investors Inc (OHI) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 Omega HealthCare Investors, Inc. Earnings Conference Call. My name is Eric, and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session toward the end of the conference.

(OPERATOR INSTRUCTIONS)

I would now like to turn your presentation over to the host for today's call, 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 a 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 identifies 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, 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 website 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 third quarter 2007 FFO, our 2007 adjusted FFO guidance and the current acquisition environment.

Adjusted FFO. Adjusted FFO for the third quarter is $0.35 per share. The primary FFO adjustments are the add-back related to a modest facility impairment and the add-back for expense related to restricted stock grants.

Turning to 2007 adjusted FFO guidance, based on our results for the first three quarters of 2007, we have increased adjusted FFO guidance to $1.37 to $1.38 per diluted share. As in the past, we will provide 2008 guidance in January.

Lastly, I'll comment on the current acquisition environment. The acquisition environment during the first eight months of 2007 was very difficult. Although we continued to see portfolios for sale, the price expectations did not fit into Omega's standard underwriting criteria. Since August, we're seeing new deals with pricing that does fit into our underwriting model. With cash availability of $201 million, we're well positioned to acquire new assets over the next 12 months.

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

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $22 million, or $0.32 per share, for the quarter, as compared to $19.3 million, or $0.32 per diluted share, in the third quarter of 2006.

As Taylor described, our adjusted FFO is $24 million, or $0.35 per share, for the quarter, which excludes non-cash restricted stock compensation expense of $500,000, a non-cash provision for impairment of $1.6 million, a $132,000 provision for income tax adjustment and the normal FIN 46 consolidation adjustments. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter was $39.2 million versus $35.1 million for the third quarter of 2006. The $4.1 million increase was primarily the result of $236 million of new investments completed since August of 2006.

The third quarter of 2007 operating expensive of $13.5 million includes a $1.6 million provision for impairment and $500,000 related to non-cash stock-based compensation expense. The $1.6 million provision for impairment charge was recorded to reduce one of our facilities currently being marketed for sale to its estimated market value. In the third quarter of 2006, the Company recorded non-cash stock-based compensation expense of approximately $3.6 million.

When excluding the provision for impairment and the non-cash stock-based compensation expense from both periods, the year-to-year increase in operating expense is approximately $1 million, and primarily it relates to additional depreciation and amortization expense associated with the new investments completed since August of 2006.

Interest expense for the quarter was $10.1 million versus $11.2 million for the same period in 2006. The reduction was primarily due to lower average debt on our balance sheet.

In December 2006, we accrued approximately $5.6 million for potential tax liabilities for fiscal years 2002 through 2006 associated with the Advocat-related party tenant issue, which is described and disclosed in our 10-K.

During the quarter, we completed and filed our 2006 federal tax return and paid approximately $2.1 million of the $5.6 million provision, which was accrued for the years 2002 through 2006. In addition, we reversed approximately $132,000 of income tax provisions previously accrued for based on our new estimates. We continue to make progress in obtaining a closing agreement with the IRS related to this issue.

Turning to the balance sheet, at September 30, 2007, we have approximately $1.2 billion of total assets, or an increase of approximately $19 million versus December 31, 2006. The increase was primarily due to the $40 million acquisition completed during the quarter, partially offset by normal accumulated depreciation. At September 30, 2007, we had credit facility availability of approximately $201 million.

On the liability side of the balance sheet, we had $578 million of debt at September 30, 2007. For the three months ended September 30, 2007, our total debt to EBITDA was 4.1 times, and our fixed charge coverage ratio was 2.7 times.

However, when you exclude the non-cash provision for impairment charge and the non-cash restricted stock compensation expense, and also include the pro forma income from our acquisition completed during the quarter, our total adjusted debt to adjusted pro forma EBITDA is 3.7 times.

I will now turn the call over to Dan Booth, our Chief Operating Officer.

Thanks, Bob, and good morning. As of September 30, 2007, Omega had a core asset portfolio of 238 facilities distributed among 29 third-party operators located within 27 states.

Operator coverage ratios remained very strong during the second quarter of 2007. Trailing 12-month EBITDARM coverage for the period ended 6-30-07 was 2.2 times versus 2.1 times for the period ended 3-31-07. Trailing 12-month EBITDAR coverage was 1.7 times as of 6-30 versus 1.7 times as of March 31, '07.

On July 31, 2007, the Company completed a transaction with Litchfield Investment Company to purchase five skilled nursing facilities for a total investment of approximately $40 million. The facilities total 645 beds and are located in Alabama, Georgia, Kentucky and Tennessee. Omega also provided a $2.5 million subordinated loan as part of the transaction.

Simultaneous with the close of acquisition, the facilities were combined into an amended and restated master lease containing 13 other facilities between Omega and Home Quality Management, an existing operator. The amended and restated master lease was extended until July 2017.

Additionally, we currently have one small portfolio restructure in the works. The restructure involves a five-facility master lease with facilities that have historically struggled to perform. Although rent has always been paid current, we have agreed in principle to a restructure that involves the sale of three facilities and the restructure relating to the remaining two properties. Rent on the overall portfolio will be reduced by approximately $400,000 per annum.

As Taylor mentioned previously, the overall acquisition market seems to be loosening up somewhat, as overall price expectations are starting to become more rational. As of today, Omega has $201 million in cash and credit availability to fund potential new acquisitions.

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

(OPERATOR INSTRUCTIONS)

The first question comes from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

Thanks. Just a couple of little odds and ends. Bob, do you have straight line rent for the quarter and maybe ending share kind of? I just didn't see the supplement up yet.

Yes, the ending share count, Jerry, is 68 million shares, and the straight line rent, which will be on the website later today, is about $2 million of non-cash revenue in that number.

Okay. And just one or two other things. The subordinated loan that you did on the Litchfield stuff -- is that basically to the operators who you're helping provide -- is it working capital, or -- just give me a little more color there.

It was to the operator, not to the seller. And it just helped them actually pay off other subordinated debt. It was just a swapping of debt.

Okay.

To another -- to a third party.

Okay. And on -- I guess you don't want to start talking too much about '08 at this point, but just investment volumes. I mean, you were down, I think, running -- running a fair amount lower than you certainly were last year, where you were sort of $200 million.

I mean, how -- I don't know if you can give me a little feel for pipeline, Dan or Taylor, but just a little more color on sort of acquisition environment, pricing, that kind of thing.

Yes, from our perspective, as I mentioned, the first part of this year all the way up through August, the market expectations were just out of our range in terms of how we value properties. And what we're seeing today I would say is consistent with what we saw from 2004 to 2006, a time period where we were able to do $200 million a year.

So my expectation, without putting any guidance on it, is that over the next 12 months we'll see activity that's similar to what we saw in that '04 to '06 period, that the first eight months of this year was just an aberration.

Okay. And pricing -- you're still sort of in that 10% range?

We are, 10% yield. We've had a couple of deals where it's been 9.9%, but basically 10%.

Okay. And basically you're still focused -- all skilled nursing, and is a lot of it with existing operators or you're doing -- seeing new people? Again, any more color there would be helpful.

For the most part, it's our franchise of existing operators who are still acquisitive. And because of that -- partly because of that, there's the focus on skilled nursing facilities. The other piece of it is in order to get the kind of yields we need, the spreads that we need, skilled is really the only place we're going to be able to go today for that.

In terms of new operators, we've had conversations. We continue to be out there. And we'll continue to look for quality operators to add to the portfolio. But I don't think, Dan, we have anything in the pipeline now that's new operator-related.

That's correct.

Okay. And mostly it's existing operators, say, buying new stuff, adding to their operations?

That's exactly right.

Okay.

The medium-sized regional operator that's looking to add five or ten facilities to their portfolio.

Okay. And just one last thing, just again kind of industry stuff. Obviously, we're seeing a lot of people move more toward a Medicare focus and a lot of emphasis on upgrading facilities, whether it's private rooms or new entrances or that sort of thing, to accommodate -- or rehabbed gyms.

Are you -- are your operators, I guess kind of where in that mix are they? Are they sort of more traditional in terms of their mix, or are they doing that kind of stuff as well? And do you see any opportunities for facility upgrades along those lines?

I can -- I would say that our top -- well, virtually all of our operators, but certainly the top 12 operators, which is 85% of our portfolio, are all keenly focused on the Medicare opportunity and the need to make sure their physical plants are up to snuff in order to attract those patients. So we are doing, in conjunction with a number of our operators, some significant capital improvements where they put the money to work and we have a 10% yield on those dollars.

So, yes, that's a major focus. That is the big opportunity for growth that we've seen. And it's one of the drivers of our improved coverages.

Okay. And that will be -- help generate investment volume as you go forward as well?

I would expect it will.

Okay. And just last thing, Taylor, and then I'll jump off. Just any color on sort of the -- just the reimbursement environment? I think that's sort of a question investors have as they read some of these headlines about nursing home in the paper.

I don't know that there's any -- there's any major driver that's going to affect reimbursement in a way that's material. There's no doubt that everyone's going to focus on the normal Medicare CPI adjustment and whether the government tinkers with that, and obviously there's the potential for some risk there. From our perspective, because our coverages are so strong, it's not really something that we worry about at all.

All right. Thanks.

Thank you.

Your next question comes from the line of Charles Place with Ferris Baker Watts. Please proceed.

Good morning.

Good morning, Charlie.

Just a couple things. First, touching upon what Jerry had mentioned earlier, when you -- when you look at the -- your acquisition pipeline, do you see anything more in '07, if I could ask that question?

We've got a -- we've got a couple very modest things going on right now. But my expectation would be if -- any of the bigger stuff, it would be very, very late '07 or early '08 if it comes to fruition. And we have nothing in -- nothing other than a couple small things that are in the -- our diligence phase.

Okay. And the sale of the two properties that you have under agreement, do you expect those to close in the fourth quarter?

Yes, we do. The sale of those properties and the associated restructure will -- should occur in the fourth quarter.

Okay. And, Bob, as it relates to the -- that you reimplemented the share -- the cash purchase option of your -- of your plan, what is the -- was that the primary reason for the increase in shares outstanding quarter sequentially quarter, sequentially?

From the second quarter to the third quarter?

Yes.

Really, it's the timing of the offering -- we did an equity offering in the second quarter, if you remember?

Right. Actually, that was --

(inaudible)

-- you reinstated that in October, so that's after the quarter end, anyways.

Yes.

What is your expectation there? I guess there's a ramp up, kind of back from investors taking advantage of that option. Is that how you look at it?

We would hope so. It's an unknown number. It was -- when it was off and running -- and as you pointed out, it will be again on November 15th -- we were averaging 250,000 shares a quarter -- excuse me, a month.

Right. Okay. And just a last question here. You have one lease that I think is expiring in the fourth quarter. I wanted to see if I could get kind of an update on the status of that tenant and prospects for a renewal.

Yes. Actually, we did a large portfolio acquisition back in '06 that actually was three portfolios that were leased to three separate existing operators of Omega. At the time we did that deal, we re-cut two of those leases. There was another one that was in place, actually, with Sun, and we're in the process of amending and renewing that as we speak.

So you would imagine, at least from where you stand right now, that that's not going to be a -- you're not going to have that -- lose that tenant.

Oh, no, absolutely not.

Sun is --

It's our largest tenant. This is a sub-segment of that lease as well.

Okay.

But, yes, we expect to actually roll it into their existing master lease.

Perfect. And I guess -- well, again, I'm going to lie now. One last follow-up thing here is that you obviously have had very strong dividend growth year-over-year. When you look out, I suppose that you would say that that's tied to your acquisition program as far as future dividend growth.

Partly through our acquisition program, and obviously we have our inflators in the basic portfolio. But if you look even over the last three years, it's been pretty consistent --

Yes.

-- in terms of what we've been able to deliver. So as a management team and from the Board perspective, our strategy is to replicate over the next three years what we've done over the last three.

Okay.

And you're right, acquisitions will be a significant component to that.

Okay. Thank you.

Thank you.

The next question comes from the line of Kristin Brown with Deutsche Bank. Please proceed.

Good morning, guys. I just wanted to ask about -- when you describe the acquisitions environment as loosening up, is that more due to movement in cap rates or a change in the competitive environment, or some combination of both?

I think it's a little bit of the competitive environment because we saw a lot of sources of debt go away. And so, to the extent that there were strategic buyers in the marketplace looking to consolidate using debt as their primary capital, that source of capital has become much more difficult since August to get.

And because of all of that, you've seen cap rates, which we don't really talk about so much the way we buy facilities, but we've seen cap rates go back up to something that's more realistic.

Okay. And then what drove the sequential downtick in G&A this quarter, and what does your guidance assume for the full year?

Yes, we think where our G&A is right now is a good run rate going forward, and what drove it down was just some slight tax refunds.

Okay.

From a state standpoint.

Okay. And then last question. What was the rate on the $2.5 million loan made in conjunction with Litchfield?

11%.

11%. Great. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

It appears we have no more audio questions at this time.

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

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect, and have a good day.