Omega Healthcare Investors Inc (OHI) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Omega Healthcare fourth-quarter earnings investors conference call. Today's conference is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to Michele Reber. Please go ahead, ma'am.

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 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 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, Michele. I will review our adjusted fourth-quarter 2008 FFO, 2009 adjusted FFO guidance, and Omega's current capital and acquisition strategy. Adjusted FFO for the fourth quarter is $0.37 per share. Annual 2008 adjusted FFO is $1.45. We have maintained the common dividend at $0.30 per share which is a payout ratio of 81% and is within our historic range of 80% to 85%.

We have two facilities in Vermont which are being managed by Genesis and which remain as owned and operated assets pending Vermont licensure. The Vermont assets generated approximately $100,000 in income for the four months September through December, which has been included in adjusted FFO. The allocated rent that will be paid by Formation when the licensing of the Vermont facilities is processed is approximately $500,000 per quarter.

Our 2009 adjusted FFO guidance is $1.47 to $1.50 per share. This guidance reflects no capital market or acquisition activity.

Turning to 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. In the fourth quarter we closed one $19.5 million acquisitions with a current operator. We expect in 2009 to take a very conservative approach to new investments, focusing primarily on the needs of our existing operators.

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

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $26.3 million or $0.32 per share for the quarter as compared to $23.7 million or $0.35 per diluted share in the fourth quarter of 2007. As Taylor described, our adjusted FFO is $30.5 million or $0.37 per share for the quarter, which excludes a $3.9 million impairment charge, a $1.9 million net loss associated with our owned and operated assets, non-cash restricted stock compensation expense of $500,000, and a $2.1 million gain on the repurchase of a portion of our preferred stock. 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 $44.3 million versus $39.6 million for the fourth quarter of 2007. The $4.7 million increase was primarily a result of approximately $2.8 million of rental income associated with $92 million of acquisitions completed since December of 2007 and approximately $2 million of mortgage interest income associated with $70 million of new mortgage financings placed in 2008.

Operating expense for the fourth quarter 2008 when excluding nursing home expenses and provisions for impairments, increased by $1.3 million as compared to the fourth quarter of 2007. The increase was primarily the result of additional depreciation expense associated with acquisitions completed in 2008. During the quarter we recorded a $3.9 million impairment charge to reduce the value of one facility to its estimated fair market value.

Interest expense for the quarter was $8.9 million versus $10.1 million for the same period in 2007. The reduction was primarily due to lower average borrowings on our balance sheet combined with lower LIBOR rates.

During the quarter we purchased 400,000 shares of our 8.375% Series D preferred stock at a price of $18.90 per share or a discount of 24% to its liquidation preference of $25 per share. This equates to an 11.1% effective yield. As a result of this transaction, we recorded a $2.1 million net gain during the quarter.

Turning to the balance sheet, at December 31, 2008, we had approximately $1.4 billion of total assets. During the 12 months ended December 31, 2008, we had several transactions which impacted our balance sheet. Some of the highlighted ones are as follows.

Year-to-date we completed $182 million of new investments comprised of $112 million in new leases and $70 million in new mortgage financings. In October we purchased 400,000 shares of our Series D preferred stock. In September we completed a $6 million common share offering generating net cash proceeds of approximately $97 million. In July we sold two 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 December 31, 2008, we had $192 million available on our $255 million credit facility which matures in March 2010. Our credit facility is made up of a syndication of financial institutions led by Bank of America and includes UBS, Deutsche Bank, GE Capital, and Citi Corp. Outside of the credit facility we have no other debt maturities until 2014. As of today we have cash and credit facility availability of approximately $209 million.

On the liability side of the balance sheet we had $548 million of debt at December 31, 2008. For the three months ended December 31, 2008, our total debt to EBITDA was 3.8 times and our fixed charge coverage ratio was 3.1 times. However, and this is very important to note, when you exclude nursing home revenues and expenses and you pro forma in the December 31, 2008, acquisition assuming that it closed on October 1, 2008, our total debt to EBITDA would be approximately 3.2 times and our fixed charge coverage ratio would be just shy of 4 times.

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

Thanks, Bob, and good morning, everyone. As of December 31, 2008, Omega had a core asset portfolio of 255 facilities distributed among 25 third-party operators located within 28 states. Operator coverage ratios remained strong during the third quarter of 2008 trailing 12 month EBITDARM coverage for the period ending at September 30, 2008, was 2.1 times versus 2.1 times for the period ended June 30, 2008. Trailing 12 month EBITDAR coverage was 1.7 times as of September 30 versus 1.7 times as of June 30.

Turning to new acquisitions. On December 31, 2008, the Company completed a $19.5 million investment with subsidiaries of Formation Capital, an existing operator of the Company. The transaction involved the purchase and lease back of two skilled nursing facilities located in West Virginia with a total of 291 beds.

The facility is in the related $2.4 million of initial annual rent were added to an existing master lease with formation. The amended and restated Master lease now includes 16 facilities and $12.7 million of annual rent, which include annual escalators.

The two former Haven facilities located in Vermont and the related $2 million of additional rent will be added upon receipt of the appropriate regulatory agencies or regulatory approvals. As part of the transaction, affiliates of Genesis Healthcare entered into a long-term management agreement with Formation to oversee the day-to-day operations of each of these facilities.

During 2008 the Company completed a total of $183.1 million of new investments. All of these investments were with existing operators of the Company totaling 25 new facilities consisting of 2,462 beds. The resulting initial rent for debt service totaled $19.4 million for an initial return of 10.61%.

As Taylor previously indicated, in 2009 we expect to take a very conservative approach to new investments, focusing primarily on the capital needs of our current operators.

Thanks, Dan. We will now take questions.

(Operator Instructions) Jerry Doctrow, Stifel Nicolaus.

Good morning. I just had a couple of things. One, just the acquisition that you made in the quarter, I guess what is most interesting there to us is the initial yield. And I was wondering if I could get a little more color on maybe the coverage ratios and whether you -- how reflective that you think that is really of current markets? I am trying to figure out sort of what is the cap rate to us NAV really.

Sure. The yield obviously reflects our view of cost of capital heading into the end of 2008. And, frankly, it's a deal that the yield went up in the process of negotiations in order for us to get approval at the Board level to close the deal, but the properties are in West Virginia. It's a great state. We feel really strongly that Formation and Genesis will do quite well and the coverage ratios are north of our standard 1.25.

But I don't think I would correlate all of that together to start thinking about cap rates in the industry because we just haven't seen enough product coming through to say here is where cap rates are falling out. It's more a function of views of cost of capital as we head in towards the end of 2008.

Okay. So if I put a 125, 1.25% coverage on a 12.3% I am getting close to a 15% cap. And what is your sense of where cap rates may be these days?

I think traditionally 12.5% has been has been a cap rates over the long term and that is probably the low end today. The high-end is 15% or 16%. It's going to depend on the quality of the product and the view. As an example, in this situation we believe the operators are going to be able to improve those operations, not unlike you see transactions in the Ensigns of the world where they acquire properties and they know they are going to be able to do better.

Okay. You know, obviously you have still got another year or so on the line, but any preliminary discussions with lenders or just are you feeling comfortable with renewal there at this point?

We feel good about renewal with some or all of the current players in the current syndicate. We have talked to most everybody. The expectation from our view is that we will sit down in the summer, hopefully, in a better lending environment. And with less than $50 million out on the line today, we feel pretty good about being able to put something in place that will take that out.

Okay. You talked about acquisitions, obviously, being modest at this point. Repurchases of additional preferred, is that something we might see as well in '09 if you get the right opportunity?

It will be opportunistic and it has been a Board level discussion. I think to the extent that we see our preferred slip down and there is some volume to be acquired, there is the possibility we would look at buying more. But it's going to be a decision with the Board as the time comes.

Okay. Maybe just one or two more, if you have got it. The timing of that Vermont licensure, obviously it's not within your control, but you were talking about it or Dan was talking about it going I think it was $2 million of annualized rent starting. Any sense about when that may flip over?

It truly is in the hands of the Vermont state regulators. We thought it would move a little bit quicker than this not having a tremendous amount of experience with Vermont itself. But it has gone slower than expected and I can't really pinpoint a date at this point. I don't want to mislead. I think we have to wait on the Vermont regulators.

Okay, it's a 2009 event, maybe first-half event?

We sure hope so.

Okay. Maybe just one general question for any of you. Just a little more color on nursing home, it sounded like the nursing home reimbursement performance out there and it sounded like the coverages remain flat. But if could you give a little color there and I will drop off.

In terms of rates, we haven't seen -- obviously, we had the increase in the Medicare rate in October and we see you that flow through. There is a lot of noise on the Medicaid front but the reality from a rate perspective is they have held relatively flat. And that is our expectation going forward that there will be a lot of noise as states work through budget issues and we see what happens from a federal perspective. But we believe for the most part rates will stay flat and coverages will follow.

Okay, thanks.

(Operator Instructions) Tayo Okusanya, UBS.

Good morning, gentlemen. Quick question, when I look at guidance versus consensus, I know your numbers don't include any acquisition guidance but could you kind of give us a sense of some of what is in your number that you end up at $1.47 to $1.50 versus consensus numbers. And what do you think some of the differences might be?

Our guidance, the $1.47 to $1.50, really works off of our fourth-quarter run rate of $0.37 and so without any acquisitions that is our current view. I am not sure -- I don't let that there are any big differences. Bob, do you have any --?

No, that is really it. It's in the guidance.

After the call we can go through that, Tayo, in more detail.

All right, I appreciate that. Thank you.

(Operator Instructions) It appears we have no further questions on the phone at this time. I would like to turn the conference back over to the speakers for any additional or closing remarks.

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

And, again, ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may disconnect at this time.