Omega Healthcare Investors Inc (OHI) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Omega Healthcare first-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 Ms. Michele Reber with the Company.

Thank you and 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 limitations, 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 information section of our website at www.OmegaHealthcare.com, 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.

Good morning. I will review our adjusted first-quarter 2009 FFO, 2009 adjusted FFO guidance, and Omega's current capital position in view of the skilled nursing facility market.

Adjusted FFO for the first quarter was $0.37 per share. We have maintained the common dividend at $0.30 per share, which equates to an 81% payout ratio and is within our historic range of 80% to 85%.

Our 2009 adjusted FFO guidance remains $1.47 to $1.50 per share.

Turning to our current capital position and view of the skilled nursing facility market, our long-term growth strategy and success has been achieved by maintaining a strong balance sheet, finding and cultivating partnerships with premier operators, and maintaining a management team that can execute on our growth strategy and deal with assets that become troubled.

Focusing on the balance sheet, Omega's leverage is extremely low, and in fact, it is much lower than many of our investment-grade peers. Importantly, Omega has had access to capital markets to fund acquisitions, which is the key driver in growing our triple net portfolio.

At this time, however, long-term bond rates for Omega, as well as other healthcare REITs, will likely price in the high 9% range. We do not find this pricing attractive, particularly given that the current market price of skilled nursing facilities does not reflect this current level of debt financing costs.

We believe that in order to re-enter the acquisition market in any meaningful way, either bond interest rates must decline or the price of skilled nursing facility assets must drop. Until such time, Omega intends to be very patient when considering new acquisitions.

In the interim, Omega's been focusing significant resources on the quality and competitiveness of our existing portfolio. Over the last two years, we have funded $30 million in physical plant renovations. We have committed an additional $45 million for future improvements.

By the end of 2010, we expect at least 50 facilities will have been completely renovated by our operating partners, with dozens of additional facilities receiving significant upgrades. These renovations provide a critical market advantage for our operating partners and significantly increase the product quality for the residents.

Turning to our portfolio, the key industry metric is cash flow to rent coverage. For the last eight years, Omega's EBITDAR coverage has increased from less than 1 times to 1.6 times today, providing our operators with ample financial cushion in today's ever-changing market conditions.

Lastly, most of the executive management team and many of our employees have been together for eight years. We have a proven track record of dealing with troubled portfolios, executing on our acquisition growth strategy, and, most importantly, delivering long-term stable growth in a not-always-stable environment.

By maintaining a strong balance sheet, cultivating strong operator relationships, we have grown quarterly adjusted FFO 61% in the last five years. From 23 -- from $0.23 in the first quarter of 2004 to $0.37 this quarter. We are very confident that, over the long term, we can continue to execute our growth strategy.

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

Good morning. Our reportable FFO on a diluted basis was $33.6 million, or $0.41 per share, for the quarter, as compared to $23.7 million, or $0.34 per diluted share, in the first quarter of 2008.

As Taylor described, our adjusted FFO is $30.5 million, or $0.37 per share, for the quarter, which excludes $4.5 million of cash received in a legal settlement, a $900,000 net loss associated with our owned and operated assets, net cash -- non-cash restricted stock compensation expense of $480,000, and a $70,000 impairment charge on a real estate asset.

Further information regarding the calculation of adjusted 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 $44.7 million, versus $40.9 million for the first quarter of 2008. The $3.9 million increase was primarily a result of approximately $3 million of rental income associated with $108 million of acquisitions completed since March 31, 2008, and approximately $2 million of mortgage interest income associated with $70 million of new mortgage financings placed in the second quarter of 2008.

These two were partially offset by a $1.2 million reduction in miscellaneous income related to the collection of old receivables in the first quarter of 2008, and fees booked related to Haven Healthcare's bankruptcy.

Operating expense for the first quarter of 2009, when excluding nursing home expenses and provisions for impairment, increased by $1.6 million as compared to the first quarter of 2008. The increase was primarily the result of additional depreciation expense associated with acquisitions completed in 2008.

During the quarter, we recorded a $70,000 impairment charge to reduce the value of one closed facility to its estimated fair-market price.

Interest expense for the quarter was $8.8 million, versus $9.7 million for the same period in 2008. The reduction was primarily due to lower average debt on our balance sheet, combined with lower LIBOR rates.

During the quarter, we collected $4.5 million as a result of a legal settlement. In 1999, the Company filed suit against a former tenant seeking damages based on claims of a breach of contract. The defendants denied the allegations made in the lawsuit.

In June of 2008, we were awarded damages in a jury trial. The case was then settled prior to appeal. In settlement of our claim against the defendants, we agreed in January of 2009 to accept a lump sum cash payment of $6.8 million. The cash proceeds were offset by related expenses incurred of $2.3 million, resulting in a net gain of approximately $4.5 million, which was paid in January of 2009.

Turning to the balance sheet, at March 31, 2009, we had approximately $1.4 billion of total assets. From the liability side of the balance sheet, we had $540 million of debt at March 31, 2009.

We had $200 million available on our $255 million revolving credit facility, which matures 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 Citicorp. Other than the credit facility, we have no other debt maturities until 2014.

As of today, we have cash and credit facility availability of approximately $220 million.

For the three months ended March 31, 2009, our total debt to EBITDA was 3.0 times and our fixed-charge coverage ratio was 3.9 times. However, when you exclude nursing home revenues and expenses, impairments, and the legal settlement received this quarter, Omega's total debt to EBITDA will be approximately 3.2 times and our fixed-charge coverage ratio will be 3.6 times.

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

Good morning. As of March 31, 2009, Omega had a core asset portfolio of 255 facilities distributed among 25 third-party operators located within 28 states. Operator coverage ratios remain strong during the fourth quarter of 2008.

Trailing 12-month operator [ebitdom] coverage for the period ended December 31 was 2 times, versus 2.1 times for the period ended September 30, 2008. Trailing 12-month operator EBITDAR coverage was 1.6 times as of December 31, versus 1.7 times as of September 30, 2008.

Turning to new acquisitions, as Taylor previously mentioned, Omega is being very conservative with its investment dollars. Although we are constantly [evaluating] potential new acquisitions, we feel there is currently a disconnect in the market between sales price and the cost of financing. As such, Omega is currently content to remain patient, and instead, deploy our precious capital in upgrading our existing portfolio facilities.

In 2008, Omega funded capital expenditures within our existing portfolio of nearly $18 million at an effective rate of return of approximately 10%. Through the first quarter of 2009, we have completed over $3 million of -- in capital expenditures with similar rates of return.

With nearly $60 million committed for new projects and capital improvements over the next 2.5 years, we expect the actual amount invested to ramp up considerably during the remaining course of the year.

Finally, I would like to make a comment on our operator performance statistics. Historically, Omega has reported operator occupancy based upon licensed beds. This has generally resulted in an average occupancy of between 81% and 82%.

Licensed beds, however, are somewhat misleading, as many of our operators have taken beds out of service in order to eliminate three- and four-bed wards, create private rooms, or add therapy and/or activity space. The result of that are operators actually have approximately 1,800 fewer beds available for service than they are currently licensed for.

When basing occupancy statistics off of available beds, Omega's operators average occupancy rises to just over 86%. In the first quarter of 2009, and in future quarters, we will report operator occupancy based upon available beds as opposed to licensed beds.

We will now open the call up for questions.

Jerry Doctrow, Stifel Nicolaus.

Good morning. It's actually Dan Bernstein filling in for Jerry. Not many questions here. But in terms of the investment environment, you talked about ramping up investments conservatively the second half of the year or into 2010. Is that primarily going to be properties, or are you also seeing opportunities perhaps in loans or other type of debt instruments?

I think from our perspective, we do think that later this year we will see the potential for more acquisition activity. We think pricing will reflect the current market environment. But it will still be our typical triple net lease. That's what we're going to do.

Again, loans are typically accommodations to current operating partners. It's always possible to see that, but that will be our strategy.

And on the financing front, you had previously discussed the HUD lien program. I wanted to see how that was going.

And also, are there other opportunities, say with the regional banks, to put secured debt on some of your properties?

There might be opportunities with regional banks to put secured debt on the properties. That's really not our focus.

We have initiated discussions with our current bank group as it relates to our revolving line of credit. That's in the early stages, so I can't really comment any more than we're in the process of discussing our line.

As it relates to the HUD lien program, we are still pursuing the potential for HUD financing. The reality is HUD is set up for owner operators, not for landlords. And so, it's complicated because you need a lot of operator cooperation, although we have a couple of operators where we think it would make sense, and we are heading down that pathway. Whether we will get to the finish line or not, I don't know.

That's really all the questions I have. Thank you.

(Operator Instructions). It appears we have no further questions in the queue. I'll turn the conference back over to Omega Healthcare management for any additional or closing remarks.

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

That concludes today's conference. Thank you for your participation. You may disconnect at this time.