Omega Healthcare Investors Inc (OHI) 2007 Q4 法說會逐字稿

Good day everyone and welcome to today's Omega HealthCare Investors conference call. Today's call is being recorded. At this time I'd like to turn the call over to Mr. Tom Peterson, Director of Finance and Investor Relations. Please go ahead, 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 assets or projections, dividend policy, portfolio restructuring, 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. Reconciliation of these non-GAAP measures to the most comparable measure under Generally Accepted Accounting Principles, as well as in the 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 Report 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 fourth quarter of 2007 FFO, our 2008 adjusted FFO guidance, the current acquisition environment, and I will briefly comment on recent events.

Adjusted FFO for the fourth quarter is $0.35 per share. Adjusted FFO for 2007 is $1.38 per share, compared to $1.24 per share for 2006, representing year-over-year growth of 11%. 2007 is the fourth year in a row that adjusted FFO growth has exceeded 10%.

As a result of our strong performance during the quarter, we increased the common dividend by one penny to $0.29 per share. This represents the 13th quarterly dividend increase in the last 17 quarters, with the common dividend increasing from $0.15 in the third quarter of 2003 to $0.29 per share today.

Turning to 2008 adjusted FFO guidance. Our 2008 adjusted FFO guidance is $1.41 to $1.43 per diluted share. This guidance does not include acquisitions. As acquisitions are closed during 2008 we will adjust the guidance upward to reflect the impact of future adjusted FFO.

The acquisition pipeline is active. We have a couple of transactions in the later stages of the pipeline that may close by the end of the first quarter. We believe that opportunities will continue to emerge throughout 2008.

Turning to recent events. In the last few weeks we closed on a single facility acquisition in New Mexico. The impact of this acquisition is included in our guidance. In addition, we exercised our option to purchase GE's first mortgage position on seven Haven facilities. By exercising this option, Omega now has additional control over the 15 Haven facilities that we are invested in.

Haven is currently operating under Chapter 11 bankruptcy protection. As part of Haven's debtor-in-possession financing budget, which is subject to a final court order on February 13th, Omega expects to be paid current throughout the bankruptcy proceedings.

It is likely that Haven's contractual commitments to Omega will be assumed by Haven or another operator, all as part of an organized plan to exit bankruptcy.

Also, we have now resolved all of our IRS Advocat-related issues with a final, signed Closing Agreement.

I'll turn the call over to Bob Stephenson, our Chief Financial Officer, who will review fourth-quarter financial results.

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $23.7 million, or $0.35 per share for the quarter as compared to $19.2 million, or $0.32 per diluted share, in the fourth quarter of 2006.

As Taylor described, our adjusted FFO is $24.1 million, or $0.35 per share, for the quarter, which excludes non-cash restricted stock compensation expense of $545,000, a non-cash provision for impairment adjustment of $220,000, a $125,000 provision for income tax adjustment, and $66,000 of 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 $39.6 million versus $36.1 million for the fourth quarter of 2006. The $3.5 million increase was primarily a result of $40 million of new investments completed during the third quarter of 2007 and placing Advocat on straight-line rent recognition in 2007.

The fourth quarter of 2007 operating expense was in line with our 2006 fourth quarter operating expense when you exclude the fourth quarter of 2007 provision for impairment adjustment of $220,000 and non-cash stock compensation expense of $545,000. That $220,000 provision for impairment adjustment was recorded to increase the value of one facility currently being marketed for sale to its estimated market value. We anticipate this facility will be closed -- sold during the first quarter.

In the fourth quarter of 2006 the Company recorded a $765,000 non-cash provision for uncollectible notes receivable.

Interest expense for the quarter was $10.1 million versus $11.9 million for the same period in 2006. The reduction was primarily due to lower average debt on our balance sheet.

As of December, 2006, we had accrued $5.6 million for potential tax liabilities for fiscal years 2002 through 2006, associated with the Advocat-related party tenant issue. During the third quarter of 2007, we completed and filed our 2006 Federal Tax Return and paid $2.1 million of the $5.6 million previously accrued for in years 2002 through 2006.

In addition, as Taylor previously mentioned, in the fourth quarter of 2007 we entered into a Closing Agreement with the IRS and paid the additional $3.5 million previously accrued. As a result of the Closing Agreement and the resolution of the related party tenant issue, we do not expect to incur Federal income tax expense associated with the related party tenant income in periods commencing after January 1, 2007.

Turning to the balance sheet, at December 31, 2007, we had approximately $1.2 billion of total assets, or an increase of approximately $7 million versus December 31, 2006. The increase was primarily due to the $40 million of acquisitions completed during the third quarter of 2007, offset by normal accumulated depreciation. At December 31, 2007, we had credit facilities availability of approximately $205 million. On the liability side of the balance sheet, we had $574 million of debt at December 31, 2007.

For the three months ended December 31, 2007, Omega's total debt to EBITDA was 3.9 times. Our fixed charge coverage ratio was approximately 2.8 times. If you exclude the non-cash provision for impairment adjustment and the non-cash restricted stock compensation expense, our total adjusted debt to adjusted EBITDA was approximately 3.7 times.

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

Thanks, Bob, and good morning everyone. As of December 31, 2007, Omega had a core asset portfolio of 236 facilities distributed among 28 third-party operators located within 27 states. Operator coverage ratios remained very strong during the third quarter of 2007.

Trailing 12-month EBITDARM coverage for the period ended 9/30/07 was 2.2 times versus 2.2 times for the period ended June 30, 2007. Trailing 12-month EBITDAR coverage was 1.8 times as of 9/30/07 versus 1.7 times as of June 30, 2007.

On January 17, 2008, Omega purchased 119-bed skilled nursing facility in Albuquerque, New Mexico for $5.2 million. The facility was added to an existing 7-facility Master Lease with Alpha Health Care Properties. The initial annual lease payment amount is $520,000.

On January 22, 2008, Omega completed a transaction with GECC to purchase an existing $39 million mortgage, due October of 2012, on seven Haven skilled-nursing facilities. The Company has an existing $23 million second mortgage on the same seven facilities. Omega now has a $62 million combined mortgage on the seven facilities with a return of 10.4%.

The Company also has a Purchase Option on the seven facilities that would allow the Company to acquire the fee-simple interest in the facilities for the amount of the mortgage. If the Company exercises the Purchase Option the seven facilities would be combined with an existing eight-facility Master Lease. The Borrowers and Guarantors under the mortgage and the Lessee, Sub-lessees, and Guarantors in respect for the Master Lease are all debtors-in-possession in the Chapter 11 proceeding being administered in New Haven, Connecticut.

Omega feels confident that it is adequately secured and that eventually these facilities will emerge from bankruptcy a better capitalized company.

As of today, Omega has $166 million in cash and credit availability to fund potential new investments.

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

(OPERATOR INSTRUCTIONS). Kristin Brown of Deutsche Bank.

Good morning guys. I just have a couple of questions. I guess the first is on the Purchase Option. Is there a timeframe for the Purchase Option? Or, how does that work exactly?

Are you talking about Haven?

Haven, yes.

The Purchase Option is exercisable at the end of the mortgage term in 2012, or, in the event of default. Haven is currently in event of default, so it is exercisable currently. And there is a possibility we'll exercise it. The exercise is the amount of the mortgage, so there wouldn't be any additional cash consideration from Omega.

Okay. And then, on the SNF (inaudible) you purchased during -- in January recently, do you think the pricing was different than it would have been maybe six months ago?

No, I think that the pricing is -- I don't think it's changed dramatically. If there was any difference it would be very modest.

And was the purchase process -- were there other bidders?

No, actually the facility had been managed by the now current operator, so it was -- they really just had an option to purchase it, which they exercised.

Okay. And the property that you're planning to sell during Q1, what prompted the sale?

That was a property that was closed during the third quarter and it's been closed and it's on our Agreement to be sold.

Okay, that's it. Thanks.

Jerry Doctrow of Stifel Nicolaus.

Good morning. You touched on this a little bit, but I wanted to, maybe from Dan and maybe Taylor as well, just get a little bit more kind of color context on the acquisition environment. Dan, I think you were just saying in response to a prior question that you don't see yields or Cap rates sort of moving much in skilled space. I was wondering if you could just elaborate on that. Maybe I'm inferring the wrong thing.

And then if you just give me a little color on kind of what you're seeing out there, how competitive? Where you feel it's going, that stuff?

Yes, Jerry. The environment was particularly choppy in 2007. We're starting to see a little bit more deals as of late. It's mostly coming though from our existing operators. They're really the ones that are presenting deals to Omega. I'm not sure there's a tremendous amount of new activity out there.

Cap rates haven't changed dramatically. If anything, they might have come down a little bit, but I wouldn't say there has been any dramatic change. I mean, obviously, the credit markets have tightened up considerably. But we're really not seeing any dramatic change other than we are seeing just a little bit of an increase in activity.

And competition for -- I mean, you talked about your existing clients primarily in terms of what's going on out there. I mean, the way I think of your existing client base are pretty solid, regional operators, and so they're just continuing to gradually grow their business. Is that kind of your sense of what's going on?

Yes, that's exactly what's going on.

Okay. And are you out there sort of trying to bring new players into the fold, or you've got enough deals coming from the existing guys that keeps you happy at the moment?

When we are -- when we see a deal that hasn't been brought to us by our operators we obviously -- we go to them generally first, but we still look at certain sale lease-backs from other operators outside of our portfolio. That's just now -- that hasn't been our bread and butter. I'm not sure that it will be in the future. But, we're looking at a pretty significant amount of deals coming through the door and many of them are with operators who are not currently in our portfolio.

Okay. And Taylor, just maybe -- I don't know if you want to add anything else. I mean, again, I think the world, at least the financial world that I live in, expects Cap rates have got to be going up here. Given what's going on in the credit markets our yields have to be going up. Dan is saying they're pretty much flat in skilled nursing and that's -- can you help us understand a little bit better what's going on there.

Well, I think, from our perspective, we passed on dozens of deals in 2007 where the implied cap rate or the bed value, however you want to talk about it in our world, just was untouchable and unrealistic from where we sat.

We're not seeing those sort of untouchable, unrealistic transactions anymore. And so, I think, to Dan's comments, the stuff we're looking at, and we're taking the time to look at, we're not seeing a lot of -- a lot of movement, but a lot of the unrealistic stuff that was flowing through the market six, nine months ago, you're just not seeing that anymore.

Because that was being done like CMBS or highly levered, or --

Correct.

And, any -- so 10% yield is what we should be thinking about. And how do you think about per-bed numbers? When you say things that were just crazy, what's kind of your --

Well, it's -- obviously it's, regionally, those numbers differ pretty dramatically in the northeast. You can see bed prices push up 80, 85,000 a bed and that wouldn't be unrealistic, given replacement costs versus taxes where you sort of think 60, 65 a bed for replacement costs. And I would compare that to transactions where -- we saw one in Maryland that was trying to be priced at 110, is that right -- yes, and north of that.

And a lot of those transactions in '07 with these unrealistic bed values and Cap rates, they actually didn't close, so especially as we moved further along in the year.

So, you're coming back -- they're coming back maybe?

Maybe.

Okay. And just last thing and then I'll jump off. We're seeing some places where there is new development and there's some discussion -- there's been some discussion by operators recently that they're really actually -- there ended up being a shortage of SNF beds because some -- the total bed supply continues to fall off. Are you [funding] much development? I mean, obviously it's limited to states where they aren't [CON] or where you can -- you can now get yourself a CON. But are you doing much in the way of development of new SNFs?

We've got a little bit ongoing today. It's not particularly material, but we have -- in (inaudible) in Ohio we have a skilled nursing facility that's likely to come out of the ground in Texas with, in all likelihood, a couple to follow. And that's just an adjunct to a broader strategy of spending Cap ex where appropriate to upgrade facilities with various operators. And I think you'll continue to see that.

But to your point, it will be limited because there are not that many opportunities to build skilled nursing facilities in states outside of states like Texas.

Okay. And do you have development in some of those Cap ex fundings, sort of included in your guidance as well, or that also until you don't -- until you commit to a deal that's not in --

It's not in our guidance.

Okay. Alright, thanks, guys.

(OPERATOR INSTRUCTIONS) Charles Place of Ferris, Baker Watts.

Good morning.

Good morning, Charlie.

My one question I had, and Bob, you touched on it quickly and I don't know if my pen was writing fast enough. You referenced a non-collectible note receivable.

That was in 2006.

Oh, it was? Okay.

That's for comparative purposes.

Okay. For the fourth quarter of '07, was there anything in the G&A line or the $2.4 million that was kind of one time in nature? Or is that just a --

Yes, as you know, G&A fluctuates a little bit. I guess the way to look at it is for '08 guidance, so to speak, we should be in the 9.5, slightly above 9.5 range. And with the assumption or the fact that the first quarter G&A is typically always higher than the second, third and fourth due to payroll tax timing funding.

Okay. Obviously, you have very little in the way of expiring leases, but I did notice that there was one in 2008. Is there -- do you expect that to be renewed and how do you expect that rental rate to be relative to the expiring rate?

We are already in contact with that particular operator. We do expect to renew that lease and the interest rate of return will stay the same. It will actually marginally go up.

Okay. Bob, can you comment a little bit on the dividend reinvestment plan for the quarter? How many shares were issued under that plan? And then kind of what -- suspending it, has it ramped up to previous levels?

Yes. We actually reinstated it in November of '07 and we did -- in November and December a little over 200,000 shares in each of those two periods, or $6.5 million. And again, in January it was at the same run rate, $3.5 million -- $3.3 million of cash [at a company] a little over 200,000 shares. And we expect that right now to continue.

200,000 shares per month, roughly $3, $3.5 million?

Yes, we can't predict the market (inaudible).

Right.

We think yes.

Okay, great. And I think that was it. I guess, I'll come front out and ask Taylor can you bracket an acquisition expectation for 2008, just to make sure that we're not overly aggressive on assumption in that area?

I guess I would just -- I would go back to a comment I made in our last quarter call, which is the environment that we see today is very similar to what we saw in 2004, 5 and 6, which were choppy. We'll have some big transactions with some smaller transactions, but if you look over that three-year timeframe, we ran at about $200 million a year.

So, without knowing what will close or not close, I see an environment that's very similar to that.

Okay, that's very helpful. That's it for me. Thank you.

(OPERATOR INSTRUCTIONS) Omotayo Okusanya of UBS.

Good morning everyone. Kind of a quick question. In regards to the ability to make acquisitions in 2008, your line of credit capacity is $255 million. You currently have $48 million on it, which means you have about $200 million in capacity on the line. But your debt to total Cap is close to about 50%. And I know very often with these lines of credit there is some type of limit of how leveraged you can be. Is there any issue with that on your particular line of credit?

Not at all. We're not even close to any of the leverage covenants with respect to our line of credit.

Could we ask what the allowed leverage covenants are?

Our leverage on the bank facility can go up to 5.25 times (inaudible).

The primary covenant is debt to EBITDA and that primary covenant Cap is 5.25 and we're sub-four right now.

So, debt to EBITDA, okay. That's helpful. Thank you.

You're welcome.

And we have no further questions at this time. I'd like to turn the call back over to Mr. Taylor Pickett for any closing remarks.

Thank you. 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.

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.