Omega Healthcare Investors Inc (OHI) 2008 Q3 法說會逐字稿

Good day and welcome, everyone, to Omega Healthcare Investors' third-quarter 2008 conference call. Today's call is being recorded. At this time, I would like to turn the call over 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 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 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. Good morning. I will review our adjusted third-quarter 2008 FFO, including an update regarding the Formation Genesis transaction, an overview of projected state budget deficits and the potential impact on state Medicaid rates, and finally, an overview of Omega's current capital and acquisition strategy.

Adjusted FFO for the third quarter is $0.34 per share. We maintained the common dividend at $0.30 per share. There's a fair amount of noise in the third-quarter results since the Formation assets were not transitioned until September 1. For the first two months of the quarter, these assets were held on our balance sheet as owned and operated assets.

Two facilities in Vermont remain as owned-and-operated pending Vermont licensure, which, when received, will enable us to transition these facilities to Formation. The Vermont assets generated approximately $450,000 in income for the quarter. The allocated rent will be paid by Formation when the Vermont assets transition is approximately $500,000 per quarter.

Cutting through the noise on a simplistic basis, assuming all the Formation assets were transitioned on July 1, the third-quarter adjusted FFO would be $0.36. Looking forward to the fourth quarter, we are maintaining our adjusted FFO guidance of $0.37 to $0.38 for the quarter, which includes the expected owned-and-operated results of the two Vermont assets that are waiting licensing approval.

Turning to state budgets and the related potential impact on state Medicaid rates. As you know, many states are projecting budget deficits, The most significant projected deficits where Omega owns facilities are in Alabama, Arizona, California, Florida, New Hampshire and Rhode Island. We believe there will be pressure to roll back rates to prior-year levels in these states and many others where there are more modest deficit projections.

These potential rate reductions could reduce rent coverage if operators are unable to cut expenses or increase census. However, even if coverage is declined, Omega's portfolio coverages are generally very strong and should easily withstand reasonable rate cuts. I also note that in previous recessions, the states have requested and received temporary federal government relief via an increase in the federal share of the Medicaid program.

Finally, the profit margins on Medicaid patients is very small, so that anything beyond relatively modest Medicaid cuts will likely put lower-quartile skilled nursing facility operators in financial trouble. We have observed many times in the past that states are not interested in discharging residents and closing facilities, and the states are even less interested in attempting to run these facilities on their own, and therefore believe that significant rate cuts are extremely unlikely.

Lastly, I will comment on our capital and acquisition strategy. We have over $200 million available on our line of credit, which matures in March 2010, and no other debt maturities prior to 2014. Our balance sheet is incredibly strong, with debt to adjusted EBITDA at 3.2 times. Over the next several months, we expect to take a very conservative approach to new investments, focusing primarily on our current portfolio and perhaps one or two modest opportunistic investments.

Having issued equity at realistic multiples in May and September of this year, we are not interested in issuing additional equity at discounted prices. We also believe that the debt markets, if available, would be very unattractive.

In addition, we've seen a dramatic slowdown in available property on the market, which is likely due to a recognition of the limited availability of capital.

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

Thank you, Taylor, and good morning. Our reportable FFO on a dilutive basis is $23.9 million, or $0.31 per share for the quarter, as compared to $22 million, or $0.32 per diluted share in the third quarter of 2007. As Taylor described, our adjusted FFO is $26 million, or $0.34 per share for the quarter, which excludes a $1.5 million loss associated with our owned-and-operated assets, non-cash restricted compensation expense of $526,000, a $170,000 provision for impairment charge, and a $72,000 provision for income tax adjustment. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter, when excluding owned-and-operated nursing home revenue, was $40.7 million versus $39.2 million for the third quarter of 2007. The $1.4 million increase was primarily a result of approximately $4.3 million of revenue associated with $208 million of new investments completed since July of 2007, and approximately $1 million of revenue associated with lease amendments. These two were partially offset by $2.3 million of reduced revenue associated with the Haven facilities and $600,000 of reduced investment income associated with payoffs on working capital and other notes since the third quarter of 2007.

Operating expense for the third quarter of 2008, when excluding nursing home expenses and provisions for impairments, increased by $1.1 million as compared to the third quarter of 2007. The increase was primarily the result of additional depreciation expense associated with $133 million in acquisitions completed after July of 2007. During the quarter, we recorded a modest $170,000 provision for impairment charge to reduce the value of one facility, currently classified as held-for-sale on our balance sheet, to its estimated market value.

Interest expense for the quarter was $9.4 million versus $10.1 million for the same period in 2007. The reduction was primarily due to lower average debt on our balance sheet.

Turning to the balance sheet, at September 30, 2008, we had approximately $1.4 billion of total assets. During the nine months ended September 30, 2008, we had several transactions which impacted our balance sheet. Year-to-date, we completed $168 million of new investments, comprised of $93 million in new leases and $75 million in new mortgage financings.

In September, we completed a $6 million common share offering, generating net cash proceeds of $97 million. In July, we sold two Sun rehab hospitals for $29 million that were classified as held-for-sale, generating a gain of just under $12 million. And in May, we completed a 5.9 million common share direct placement offering, generating net cash proceeds of approximately $99 million.

At September 30, 2008, we had $219 million available on our $255 million credit facility, which matures in March 2010. We expect no issues in accessing our credit facility, which is made up of a syndication of large financial institutions led by Bank of America, with other participants being UBS, GE Capital, Deutsche Bank and Citicorp. Outside of the credit facility, we have no other debt maturities until 2014.

On October 16, we purchased 400,000 shares of our 8.375% Series D preferred stock at a 24% discount to its liquidation preference. This equates to an approximate 11.1% yield. As a result of this transaction, in the fourth quarter, we will book a $2.1 million gain. As of today, we have cash and credit facility availability of just over $219 million -- approximately $220 million.

On the liability side of the balance sheet, we had $520 million of debt at September 30, 2008. $485 million of that comes due after 2013. For the three months ended September 30, 2008, Omega's total debt to EBITDA was 3.6 times and our fixed charge coverage ratio was 2.8 times. When you exclude nursing home revenues and expenses and a pro forma ended September 30, 2008 acquisition, assuming it closed on July 1, 2008, Omega's total debt to adjusted pro forma EBITDA is approximately 3.2 times.

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

Thanks, Bob, and good morning. As of September 30, 2008, Omega had a core asset portfolio of 254 facilities distributed among 27 third-party operators located within 29 states. Operator coverage ratios remained strong during the second quarter of 2008. Trailing 12-month EBITDARM coverage for the period ended 6/30/08 was 2.1 times versus 2.2 times for the period ended March 31, 2008.

The slight drop in coverages was primarily attributable to results at the former Haven facilities, which were part of a Chapter 11 bankruptcy proceeding. As previously reported, operational control of these facilities was transferred to Genesis Healthcare effective September 1, 2008. Although it is too early to have received financial results, we have every confidence that the Formation-Genesis team will be able to bring back stability and profitability back to these once very successful nursing homes.

At this point, I think it would be worthwhile to provide additional detail on our corporate-wide rent coverages and how those coverages are broken down within Omega's portfolio. Fourth-quarter 2008 annualized revenue is expected to approximate $162 million. Of that, $106 million of revenue, or just over 66%, comes from portfolios which have EBITDAR-to-rent coverages in excess of 1.65 times. $41 million of revenue, or just over 25% of Omega's income, is derived from portfolios that currently have EBITDAR to rent coverages of between 1.2 and 1.65 times. Only $15 million of revenues, or approximately 7% of Omega's income, comes from portfolios which have coverages of less than 1.2 times.

Breaking that segment down further, of the $15 million of revenue with coverages of less than 1.2 times, $12 million of that comes from the former Haven facilities, which have most recently been transferred and which we anticipate will steadily improve under the guidance of the Formation-Genesis team.

Turning to new acquisitions, on September 30, 2008, the Company completed a $40 million investment with subsidiaries of Guardian LTC management, an existing operator of the Company. The transaction involved a sale and leaseback of three skilled nursing facilities and one CCR facility, all located in Pennsylvania. The facilities and related $4 million of initial annual rent were added to an existing master lease with Guardian. The amended and restated Master lease now includes 21 facilities and $15.7 million of annual rent, with annual escalators. In addition, the master lease term was extended from August 2016 to September 2018.

As of today, Omega had $220 million in cash and credit availability to fund potential new investments.

Thanks, Dan. We will now take questions.

Thank you. (Operator Instructions) At this time, we have no questions. I would like to turn the conference back over to Mr. Taylor Pickett for any additional or closing comments.

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

This concludes today's conference. We thank you for your participation. Have a nice day.