Omega Healthcare Investors Inc (OHI) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Omega Healthcare Investors earnings second quarter release conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call to [Michelle Reiber]. Please go ahead, ma'am.

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 restructuring, rent payments, financial conditions 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 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, Michelle, and good morning. I will review our adjusted second quarter 2008 FFO, the status of the Haven portfolio and the Formation Genesis transaction, and our new adjusted FFO guidance. In addition, I will provide an overview of our strong portfolio performance.

Turning to adjusted FFO. Adjusted FFO for the second quarter is $0.38 per share. We maintained the common dividend at $0.30 per share. This is slightly below the low end of our target payout percentage of 80% to 85% of adjusted FFO, which in part reflects a conservative dividend until the Haven portfolio issues are fully resolved.

Yesterday, Omega signed an agreement with Formation Capital to lease the Haven portfolio. Genesis will manage the portfolio. The base rent is slightly less than the historical rent paid by Haven Healthcare. Omega is very pleased to bring the Genesis operating expertise and management depth to these facilities.

Turning to 2008 adjusted FFO guidance. We have withdrawn the 2008 adjusted FFO guidance of $1.49 to $1.55 per diluted share. However, assuming the Formation Genesis transaction closes during the third quarter, our fourth quarter adjusted FFO guidance is a range of $0.37 to $0.38 per diluted share, annualized for the fourth quarter of $1.48 to $1.52. At this time, it is impossible to project our third quarter adjusted FFO due to the uncertainty of the Haven portfolio results. In addition to normal operating income or loss from the Haven portfolio, Omega incurred significant costs acquiring the Haven assets out of bankruptcy.

Lastly, turning to portfolio performance, I would like to provide a brief snapshot of our very strong portfolio performance. As of March 31, 2008, the EBITDAR coverage ratio -- that's EBITDAR divided by rent -- for 16 separate operators making up nearly 66% of our facilities, was above 1.75 times. This is incredibly strong coverage, which provides very significant downside protection.

Seven operators making up 26% of our facilities operate in a coverage range of 1.2 times to 1.75 times. I would call this a normal, or typical coverage. So 92% of Omega facilities have good or excellent coverage. The remaining 8% consisted of the former Haven portfolio, which is 6% of our facilities and 2% of other facilities representing less than 1 million of projected rent. Prior to filing bankruptcy, Haven operated in the 1.2 times to 1.7 times range. We expect that Genesis will return Haven to this range.

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

Thank you, Taylor, good morning. Our reportable FFO on a diluted basis is $24.4 million or $0.33 per share for the quarter as compared to $22.4 million or $0.33 per diluted share in the second quarter of 2007.

As Taylor described, our adjusted FFO is $27.9 million or $0.38 per share for the quarter, which excludes non-cash restricted stock compensation expense of approximately $0.5 million; a non-cash provision for uncollectible accounts receivable of $4.3 million; $700,000 of miscellaneous cash receipts; $500,000 of cash receipts from a legal settlement; and $45,000 of FIN 46 consolidation-related adjustments. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter was $43.7 million versus $38.1 million for the second quarter of 2007. The $5.6 million increase was primarily a result of approximately $4.5 million of revenue associated with $168 million of new investments completed since the second quarter of 2007; approximately $500,000 of revenue associated with the first quarter 2008 Sun lease amendment; and $700,000 associated with the collection of Haven late fees and default interest.

Operating expense for the second quarter of 2008 increased by $5.4 million over the second quarter of 2007. The increase is primarily as a result of additional depreciation expense associated with $168 million of new investments placed in service after the second quarter of 2007; $200,000 associated with the restricted stock expense; and $4.3 million in expense for uncollectible accounts receivables associated with our Haven portfolio. The $4.3 million expense relates to $3.3 million of straight-line rent receivables and $1 million of pre-petition contractual receivables. Excluding these items, operating expenses were in line with last year.

Interest expense for the quarter was $9.7 million versus $10.1 million for the same period in 2007. The reduction was primarily due to lower average debt on our balance sheet combined with lower LIBOR rates.

Turning to the balance sheet, at June 30, 2008, we had approximately $1.3 billion of total assets. During the quarter, we had several transactions, which impacted our balance sheet. In April, we completed $123 million of new investments, comprised of $48 million in new leases and $75 million in new mortgage financings. And in May, we completed a $5.9 million common share direct placement offering, generating net cash proceeds of approximately $99 million.

At June 30, 2008, we had credit facility availability of $151 million. On July 1, 2008, we sold our two Sun rehab hospitals for $29 million that were classified as held-for-sale at June 30, 2008. We will recognize a gain of approximately $12 million in the third quarter as a result of the sale. As of today, we have cash and credit facility availability of approximately $180 million. On the liability side of the balance sheet, we had $589 million of debt at June 30, 2008.

For the three months ended June 30, 2008, Omega's total debt to EBITDA was 3.97 times and our fixed charge coverage ratio was 2.9 times. When you exclude the non-cash provision for uncollectible accounts receivable, the one-time Haven-related revenue, the non-cash restricted stock compensation expense and FIN 46-related expenses, Omega's total adjusted debt to adjusted EBITDA is approximately 3.6 times.

Finally, as a result of the Bankruptcy Court ruling on July 7, 2008, we took possession of our Haven facilities and invested in a new entity engaged to operate the facilities. During the third quarter, in accordance with FIN 46R, we plan to consolidate the operating results of this entity into our financial statements. Accordingly, we expect our third quarter results of operations to include both nursing home revenue and expense line items. Although we have not closed the books for the new entity for the month of July, internal reports indicated that nursing home revenues were approximately $10 million and generate a positive cash flow.

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

Thanks, Bob, and good morning, everyone. As of June 30, 2008, Omega had a core asset portfolio of 252 facilities, distributed among 26 third party operators located within 29 states. Operator coverage ratios remain very strong during the first quarter of 2008. Trailing 12-month EBITDAR coverage for the period ended 3/31/'08 was 2.2 times versus 2.2 times for the period ended 12/31/'07. Trailing 12-month EBITDAR coverage was 1.8 times as of March 31, 2008 versus 1.8 times as of December 31, 2007.

As previously discussed on Omega's first quarter earnings call, on April 18, 2008, Omega completed approximately $123 million of combined new investments with affiliates of CommuniCare Health Services. The investments involved 14 skilled nursing facilities, one assisted living facility, and one rehab hospital, totaling 1,674 beds in Ohio and Maryland.

Annualized cash income from this investment is $12.9 million in year one. Subsequently, on July 1, 2008, Omega sold two rehab hospitals formerly leased to Sun Healthcare for $29 million. As a result of the sale, Sun's annual rent was reduced by $1.7 million annually.

As Taylor mentioned, yesterday, Omega entered into a master transaction agreement with affiliates of Formation Capital, whereby Formation has agreed -- subject to certain closing conditions, including the receipt of licensure -- to lease 14 skilled nursing facilities and one assisted living facility under a master lease. These facilities were formerly leased to Haven Healthcare. The facilities are located in Connecticut, Rhode Island, New Hampshire, Vermont and Massachusetts.

As part of the transaction, Formation intends to enter into a long-term management agreement with Genesis Healthcare. Genesis is a leading healthcare provider with more than 200 skilled nursing centers and assisted living communities, in 13 Eastern states, including each of the five states in which these facilities are located.

Formation Capital is an experienced equity investor in the senior housing industry with economic interest in more than 300 healthcare facilities. The lease has an initial term of 10 years and an initial annual cash rents of approximately $12 million.

In addition, Formation has an option after the initial 12 months to convert eight of the leased facilities into mortgage properties with economic terms substantially similar to that of the original lease. The transaction is expected to close on or about September 1, 2008.

Omega's second quarter results include annualized revenue of $12.8 million under the former Haven lease. This compares with approximately $12 million of annualized cash rent expected in the fourth quarter of 2008 under the new Formation lease. As of today, Omega has $180 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). Jerry Doctrow, Stifel Nicolaus.

I just wanted to actually talk a little bit more about acquisition environments. I mean -- one, congratulations on the Haven thing. I think this will be a good resolution. But acquisitions -- can you give us a little more color on what the pipeline looks like, maybe yields on the stuff you're doing and what you're seeing sort of go forward here?

Yes, Jerry. The pipeline has started to grow here in the last several quarters. Right now it's running in the several hundred million dollar range. Yields are holding firm at the 10% for the most part of what we're looking at. We've got a number of deals that are actually in the Q, so I think the pipeline is building up. I think the lack of other financing sources has helped contribute to that.

Any sense of what volume you might do here year-end? Has Haven been a distraction? Or you still have stuff tee'd up that you could --?

Yes, we have a couple of things that I would say are the latter stage of the pipeline, that I would expect we would be able to close before year-end. And then as Dan mentioned, there's a lot of stuff bouncing around in the earlier part of the pipeline.

In terms of overall dollars, I don't think we're prepared to talk about that, but there is a fair amount going on.

Okay, thanks.

(OPERATOR INSTRUCTIONS). It appears we have no other questions at this time. I'd like to turn it back to our presenters for any additional or closing remarks.

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

That does conclude our call. We'd like to thank everyone for their participation. Have a great day.