Omega Healthcare Investors Inc (OHI) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the fourth-quarter earnings call for 2009. (Operator Instructions). As a reminder, this event is being recorded.

I would now like to introduce your host for today, Ms. Michelle Reiber of the Company. Ma'am, please go ahead.

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 policies, portfolio restructuring, rent payments, financial conditions or prospects of our operators and our 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 & Exchange Commission, including without limitation our most recent report on 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.

Thanks, Michelle, and good morning. Adjusted FFO for the fourth quarter is $0.36 per share and full-year 2009 adjusted FFO is $1.47. The $0.01 decrease in adjusted FFO from the third quarter 2009 to the fourth quarter is due to the additional common stock issued under the equity shelf program in the third quarter. We have increased the common dividend to $0.32 per share, which reflects expected incremental cash flow as a result of the first CapitalSource on December 22.

The two principle adjustments to get to adjusted FFO are the addback of CapitalSource acquisition costs, which can no longer be capitalized for accounting purposes, and the addback of a non-cash provision for uncollectible accounts. This provision relates to our Formation Genesis portfolio, which is being restructured. I will address Formation in detail later in the call.

Turning to the CapitalSource transaction, we closed the first part of the transaction on December 22, and these assets have been folded into the Omega portfolio. The second closing, which consists of the HUD encumbered assets, is still slated for April 1, although that date could move based on the time that it takes to get feedback from HUD.

The third option portfolio closing will hopefully occur later this year, assuming our equity price makes it accretive to raise capital necessary to exercise the option.

Moving on to Formation, as we noted in our third-quarter call, the Formation portfolio, formally the Haven portfolio, has struggled particularly in Connecticut. Omega and Formation have agreed to transition the four Connecticut facilities to another operator. Omega has identified and is in negotiations with an alternative operator.

In addition, the Formation master lease will be amended to reflect the transition of the Connecticut facilities. The master lease rent will be reduced, and other less significant lease terms will be modified.

None of the Formation documents are in final form; however, because we are in this process, we determine that a portion of previously recorded straight-line rent should be written off, as I noted earlier, in my adjusted FFO discussion. The likely FFO impact from the Connecticut transition and Formation amendment is not material and is expected to be less than $3 million per year.

Turning to FFO guidance, we have provided adjusted FFO guidance on a quarterly run-rate basis post the CapitalSource second closing of $0.40 to $0.42 per share. We believe this is the clearest way to view Omega's projected results because there are so many unusual parts in the fourth-quarter 2009 and in the first-quarter 2010. The biggest issues affecting our quarterly run-rate will be one, the negative arbitrage of holding cash from our bond proceeds; two, the final outcome of Formation restructuring; and finally, three, the ultimate timing of the HUD closing. By selling $200 million of bonds in February, we put ourselves in a good position to use our revolver to fund a portion of the purchase option if we elect to exercise the option.

From a capital market perspective, our ability to sell equity at an attractive price will be an important factor in the timing of the option exercise. We expect if exercised that the option portfolio will be accretive.

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 $24.9 million or $0.29 per share for the quarter as compared to $26.3 million or $0.32 per diluted share in the fourth quarter of 2008. Our adjusted FFO is $30.8 million or $0.36 per share for the quarter, which excludes a provision for uncollectible accounts receivable and deferred revenue of $3.9 million, resulting from the Formation negotiations, $1.6 million of acquisition-related expenses related to the CapitalSource transaction, non-cash restricted stock compensation expense of $480,000, and it also excludes the net income associated with our owned and operated assets. 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 $44.5 million versus $44.3 million for the fourth quarter of 2008. Operating expense for the fourth quarter of 2009, when excluding nursing home expenses, provisions for uncollectible accounts receivable and acquisition expenses, increased by $1.1 million as compared to the fourth quarter of 2008. The increase was primarily the result of additional depreciation expense associated with $20 million of acquisitions completed in December of 2008 and 10 days of depreciation when the CapitalSource assets acquired in December 2009.

Interest expense for the quarter, when excluding non-cash deferred financing costs, was $9.4 million versus $8.9 million for the same period in 2008. This increase was due to higher average debt balances on our balance sheet, primarily associated with the $100 million term loan and the $59 million of assumed debt, both of which occurred in December of 2009. We completed a number of transactions in 2009, which had significant impacts on our balance sheet.

On June 12 of 2009, we entered into a $100 million equity shelf program. This is also known as a continuous equity program. With this program we can sell shares of our common stock in open market transactions. During the third quarter of 2009, we issued 1.4 million shares of new common stock under this plan, generating net proceeds of approximately $24 million.

On June 30, 2009, we entered into a new $200 million revolving senior secured credit facility, which matures in June 2012. The credit facility is priced at LIBOR plus an applicable percentage based on our consolidated leverage and has a 2% LIBOR floor.

On December 18, 2009, we entered into a secured 100 million five-year term loan. The term loan bears interest at LIBOR plus 5.5% and has a 1% LIBOR floor. On December 22, 2009, we completed the first closing in the CapitalSource transaction, whereby we purchased entities owning 40 facilities and the option to purchase 63 additional facilities. The aggregate purchase price paid at closing was $294 million, which included $25 million for the option. The total consideration consisted of $184 million in cash, assumption of $59 million of 6.8% mortgage debt, and 2.7 million shares of Omega common stock. At December 31, 2009, we had approximately $1.7 billion of total assets.

On the liability side of the balance sheet, we had $738 million of debt at December 31, 2009, and we had $106 million available on our $200 million revolving credit facility.

Subsequent to December 31, 2009, we issued $200 million of senior unsecured 7.5% notes due 2020. Proceeds from the sale of these notes were used as follows. On February 10, 2010, we repaid all outstanding borrowings under our credit facility. On February 16, 2010, we repaid the $59 million of debt that we assumed in the CapitalSource transaction, and the remaining cash of $35 million is currently sitting on our balance sheet.

For the three months ended December 31, 2009, our total debt to annualized EBITDA was 4.9 times, and our fixed charge coverage ratio was 3 times. However, when you're looking at actual leverage, you will need to pro forma in the December 22, 2009 CapitalSource acquisition, assuming it closed on October 1, 2009, and eliminate the acquisition deal costs and provision for uncollectible accounts receivable. Our total debt to adjusted annualized EBITDA is 3.7 times, and our fixed charge coverage ratio is 3.2 times.

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

Thank you, Bob, and good morning. As of December 31, 2009, Omega had a core asset portfolio of 293 facilities distributed among 35 third-party operators located within 32 states. Included in the facility totals are 40 assets acquired from CapitalSource effective December 22, 2009.

Operator coverage ratios in the Omega portfolio remains strong during the third quarter of 2009. Trailing 12-month operator EBITDARM coverage for the period ended 9/30/09 was 2 times versus 2 times for the period ended June 30, 2009. Trailing 12-month operator EBITDAR coverage was 1.6 times as of September 30 versus 1.6 times as of June 30, 2009. By combining the operating results of both the existing Omega portfolio and the newly acquired CapitalSource assets, the consolidated trailing 12-month operator EBITDARM coverage remained at 2 times, while the trailing 12-month operator EBITDAR coverage remained at 1.6 times, showing the consistent strength of both portfolios.

As part of the previously announced CapitalSource transaction, Omega expects to close on a separate group of 40 facilities sometime during the second quarter of this year. That portfolio of assets represents nearly 5000 beds located in Florida and Mississippi and is part of 13 in-place leases with two separate operators. 29 of the 40 facilities have existing HUD mortgages in place, which Omega most assume and HUD must provide consent prior to closing.

In addition to the 40 acquired facilities and the 40 additional to be acquired facilities encumbered by HUD mortgages, Omega has the option to acquire 63 additional facilities from CapitalSource, representing approximately 6600 beds located in 19 states, which are part of 30 in-place leases with 18 separate operators.

In addition to the pending CapitalSource transactions, Omega has seen an uptick in potential investment opportunities. As of today, Omega has nearly $35 million in cash on our balance sheet and $200 million in revolving credit capacity in order to potentially take advantage of some of these investment opportunities.

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

(Operator Instructions). Daniel Bernstein, Stifel Nicolaus.

I noticed in the press release that you had indicated that there was assumable debt on the third tranche. If I recall, that's the first time I have seen you mention debt affiliated with the third option tranche. I wanted to know what that was, and if that is truly assumable, and what rates those are at?

It is technically assumable debt. The assets in the third closing of the option portfolio are encumbered by CMBS debt and a piece of mezzanine debt that we could go through a process of trying to assume. However, it matures in two years, and we have never had any interest in assuming that debt. Our whole strategy has been to take out that option with Omega balance sheet cash.

And is your earnings preference for the financing of that option tranche whether it be debt or equity, or you have not come to that point yet?

We have talked about it a bunch. I think it is clear that we're going to want to issue equity at some level to keep our leverage in the range that we like to keep it in, which is low to mid 4 times debt to EBITDA. So part of the exercise of that option is going to be the sale of or the expected sale of equity to keep us in that leverage range. We have got a revolver available. A likely outlet for the balance of that is some use of revolver proceeds.

I don't want to get too far ahead, but assuming you complete the second tranche and in the third tranche, is there going to be a need for a transition period before you start looking at other acquisitions, or are you going to feel comfortable enough to go out and make acquisitions?

And then secondly, do you think you will go back to a typical transaction size that you have done in the past, or are you seeing other options out there that might be larger portfolios such as the snip operators that went private a couple of years ago?

As it relates to the first part, we will be comfortable. We feel comfortable continuing to acquire as we have. The biggest transition we have is the operator relationships, and we are rapidly -- we have our arms around the first closing and the second closing, and we are starting through with some of the operators already in that potential option portfolio.

In terms of mechanically analyzing the property and the financial results of the properties, our back shop is easily able to handle that. And so the answers we will continue to be acquisitive at whatever pace makes sense.

The second part of the question, will we see -- I guess really is, will we see bigger portfolios, we are seeing our normal pipeline volume coming through. Historically we have run at $200 million or $300 million a year. When things have been normal, I would say that is the type of pipeline we are seeing, although it is always choppy. And there are some bigger transactions out there that we would be in a position to look at. But I think all of those have a little bit more seasoning before they are going to really be in the market.

Alright. That's all the questions I have for now. I will let somebody else jump on.

(Operator Instructions). Hank Rauch, Liberty Mutual.

I'm not that familiar with your portfolio. Do you have other assets in Connecticut, or is that the only set of assets there? And is this something specific to that state, or was it more specific to the operator?

You know, that is all the properties that we have in Connecticut currently. And then it is a fairly difficult environment to operate in. Those facilities have struggled for some time in that state. But we think, once again in the hands of the right operator, those facilities could flourish.

And what are the kinds of things that you think the new operator is going to be able to do that would be different to sort of maybe reposition those assets in some way?

You know, it is the block and tackling, if you will. They have got an increased census, so they got to focus on that, and they do have to increase cost containment because those facilities run high costs right now.

And is there any capital that is needed for those assets to reposition them, and are you providing any of that, or is that going to be on them?

You know, there was capital provided with Formation, but most of those maintenance items have been taken care of. So it is actually modest capital requirements going forward.

I show no further questions at this time.

Very good. That concludes our call for today. If there's any follow-up questions, Bob Stephenson, our Chief Financial Officer, will be available.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great afternoon. Thank you.