Omega Healthcare Investors Inc (OHI) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Omega Healthcare Investors, Incorporated Third Quarter Earnings Call for 2010. (Operator Instructions) I would now like to turn the conference over to Ms. Michelle Reiber.

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 restructuring, rent payments, financial condition or prospects of our operators, contemplated acquisitions, 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 and 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. Reconciliation for these non-GAAP measures to the most comparable measure under General 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 third quarter is $0.45 per share. We increased our common dividend by $0.01 per share, up to $0.37 per share. This reflects a payout ratio within our historical policy range of 80% to 85%. We have narrowed our quarterly adjusted FFO guidance range to $0.43 to $0.44 per share. This run rate reflects the full impact of the CapitalSource closing, the equity issuances during the third quarter, and in October the sale of our 2022 bonds.

Our balance sheet and liquidity are in excellent shape. We have nearly all of our $320 million line of credit available for acquisitions. Our first bond maturity is 2014, and we repaid the secured GE Term Loan that had a 2014 maturity.

In addition, our debt to EBITDA leverage is back under 4.5 times. In recognition of our prudent asset and debt management, Moody's upgraded Omega to BA2 on September 13.

The CapitalSource assets have been fully transitioned into Omega, and as expected, we're seeing new opportunities from these operators in addition to our normal transaction sources.

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 diluted basis was $42.5 million, or $0.44 per share for the quarter, as compared to $30 million, or $0.36 per diluted share, in the third quarter of 2009. Our adjusted FFO was $43.5 million, or $0.45 per share for the quarter, and excludes non-cash restricted stock compensation expense of $450,000, $78,000 of acquisition-related expenses, and it also excludes a $480,000 net loss associated with the runoff of expenses from our former 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 revenues, was $59.7 million versus $45 million for the third quarter of 2009. The increase was primarily a result of $25 million of revenue associated with the CapitalSource acquisitions completed in December of 2009 and June of 2010, and incremental revenue associated with our capital improvements made to our facilities throughout 2009 and in 2010. This was partially offset by $1 million quarterly decrease in Formation's rent, based on their amended first quarter 2010 contract.

The $69.7 million of revenue for the quarter was composed of $65.7 million of cash revenue and $4 million of non-cash revenue. Operating expense for the third quarter of 2010, when excluding nursing home expenses, provision for impairments, and acquisition (inaudible) expenses increased by $18.4 million as compared to the third quarter of 2009. The increase was primarily the result of additional depreciation expense associated with nearly $900 million of CapitalSource assets acquired in December 2009 and June 2010, as well as additional G&A primarily related to the acquisitions. We believe our G&A run rate should be approximately $13.5 million annually, assuming no extraordinary transactions or unusual events.

Interest expense for the quarter when excluding non-cash deferred financing costs was $19 million versus $9.2 million for the same period in 2009. The increase of $9.8 million in interest expense resulted from higher debt balances associated with a full quarter of interest related to the $200 million 7.5% bond due 2020 that were issued in February of 2010 and a full quarter of interest related to the $202 million of debt we assumed to partially finance the CapitalSource acquisitions.

Turning to the balance sheet, we completed a number of transactions in 2010 which had and will have a significant impact on our balance sheet. In February, we issued and sold $200 million 7.5% senior unsecured notes due 2020. In April, we entered into a new, $320 million revolving senior secured credit facility which matures in April 2014.

In two separate closings in June, we acquired 103 facilities from CapitalSource for approximately $563 million. Consideration consisted of $358 million in cash, $53 million of assumed HUD debt that bears a blended interest rate of 6.61%, $129 million of assumed HUD debt having an interest rate of 4.85%, $20 million of assumed subordinated 9% notes, and $3 million in Omega common stock.

In addition, we issued CapitalSource an additional $15 million in Omega common stock as consideration for escrowed funds transferred to us at closing.

In addition to the equity issued in the CapitalSource closings, for the first nine months of 2010 under our two equity shelf programs also known as Continuous Equity Programs, or [At The Market] programs, we sold 6.8 million shares of new common stock generating net cash proceeds of approximately $137 million. Under our dividend reinvestment and common stock purchase plan, we issued 2.2 million shares of common stock generating net cash proceeds of approximately $43 million.

In October of 2010, we issued and sold $225 million of 6.34% senior unsecured notes due 2022. Proceeds from this offering were used to pay outstanding balances on our credit facility. Also in October, we repaid our $100 million secured term loan. As a result of the prepayment of the term loan, in the fourth quarter of 2010, we will report a $2.2 million charge to write off the unamortized balance of the [first] financing costs.

At September 30, 2010, we had approximately $2.3 billion of total assets. On the liability side of the balance sheet, we had $1.1 billion of debt and we had $177 million of revolving credit facility availability for use. Today, we have $310 million of credit facility available for use. We also have $75 million of shares available to issue under our equity shelf program.

For the three months ended September 30, 2010, Omega's total debt to annualized EBITDA was 4.4 times, and our fixed charge coverage ratio was 2.9 times. I'll now turn the call over to Dan Booth, our Chief Operating Officer.

Thanks, Bob, and good morning. As of September 30, 2010, Omega had a core asset portfolio of 395 facilities distributed among 49 third-party operators located within 35 states. Operator coverage ratios remained stable during the second quarter of 2010. Trailing 12-month operator EBITDARM coverage for the period ending June 30 was 2 times, versus 2 times for the period ended March 31.

Trailing 12-month operator EBITDAR coverage was 1.6 times as of June 30, versus 1.6 times as of March 31.

During the third quarter, Omega committed approximately $24 million for the purpose of constructing four new skilled nursing facilities in Michigan. The transaction was structured as a mortgage loan to accommodate Michigan's reimbursement system. The loans have a 10-year maturity beyond completion of construction and bear interest at 12.5%.

In addition to the four new Michigan construction loans, Omega currently has a 120-bed facility in Texas nearing completion, two new facilities in Florida nearing commencement of construction, and multiple renovation and expansion projects currently under way or in the planning stages. Omega has funded nearly $9 million and $26 million during the third quarter and year-to-date respectively, on renovation and expansion projects. We expect new construction and extensive renovation projects to be a growing component of Omega's overall business strategy, as we continue to position our portfolio of assets into the upper tier of each property's respective market.

Lastly, Omega continues to see a healthy pace of new investment opportunities. As previously stated, Omega has nearly $310 million in revolving credit capacity to take advantage of these new opportunities.

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

(Operator Instructions) Our first question comes from Omotayo Okusanya from Jeffries & Company, your line is open.

Hi guys, good morning everyone, how's everyone doing?

Good, how are you Tayo?

Very good, thank you. Couple of questions. The [CSC] portfolio, now that it's fully integrated, could you just talk a little bit about -- I mean, you've mentioned earlier that with the new relationship you actually see new opportunities possibly to add value by acquisitions and new investments. Can you talk a little bit about that? And (inaudible) give us a sense of the operating metrics around the CSC portfolio relative to the original OHI portfolio?

Okay, sure. Yes, we are seeing new opportunities from the CapSource operators. They were, many of them were sort of capital-starved, not just for renovations and upgrades, but also on the acquisition front. So, we are seeing a good bit of that, and expect to see more as we folded in some of these operators and get to know them.

As far as the CapitalSource portfolio, what it looks like versus Omega, when we underwrote it, their credit stats were very similar to Omega's both in terms of EBITDARM and EBITDAR coverage ratios. But also, in terms of occupancy and payor mix. You can notice that the stats for June 30, which incorporate the 103 facilities that we took on in June, the stats are virtually on top of each other. There's a slight dip, but that reflects the CapitalSource portfolio had a slightly lower occupancy and a slightly lower Medicare census, but they were virtually on top of each other.

Okay. That's helpful. And then second question, the mortgage loans around the construction of the new Skilled Nursing Facilities in Michigan. Any reason why that structure made more sense versus just kind of outright investment in the real estate itself?

It really comes down to Michigan has a reimbursement system, will reimburse for interest on a mortgage loan, and the reimbursement from a lease perspective is a much smaller component within the Medicaid rate. So, to invest in Michigan efficiently with an operator, the best way to do it is via mortgage. And you can see, we get a pretty nice return on that mortgage loan, it's 12.5%.

Okay. And the reimbursement is going to the operator, correct?

That's correct.

Okay, got it. And just last question, can you talk a little bit just about acquisition outlook going forward, what you're seeing, potential cap rates, and how much activity we could potentially see out of you over the next few quarters?

I think in terms of modeling quarter to quarter, that's going to be tough as it always has been within the Omega portfolio, but I will say that the pipeline is certainly active and it's the type of activity that we've seen historically when we're closing [$200 million], $300 million, $400 million a year in deals. And we have stuff in the pipeline today that looks promising, but the kind of lay it out, quarter by quarter, that's going to be a tough one. I think to think about it on an annual basis, where you look at us being able to do [$200 million], $300 million a year, that would be the way to look at it. With timing pretty much unknown.

In terms of cap rate, sliding back in a little bit, where a year ago we were looking at 10.5% yields, cash-on-cash yields, and 135, 140 coverages and a new underwriting. I think those cash yields have slid in, and depending on the credit you're probably looking at 10% as kind of a typical year, which is where we've been historically. That would be my expectation going forward.

On the coverage ratio, still the same?

Yes, I think --

135 to 140?

I think 135 to 140 is reasonable. That's ultimately going to come down to the quality of the property and the rest of the credit relationship.

Got it, good, thank you very much.

Thanks, Tayo.

(Operator Instructions) Our next question is from Kirk Streckfus from Stifel Nicolaus, your line is open.

Thank you, good morning. Just a follow-up to that last question, are you seeing any change in the competitive environment for acquisitions at all, or maybe you could give us some more color there?

Dan, do you want to (inaudible)?

I would say that activity in the sector in general has picked up, and we are seeing some different players come in. But it all depends on size, sort of the smaller facility transactions. We're seeing some sort of regional banks and some other folks come up on the bigger transactions, you know, the $100 million plus. We're still not seeing a lot of people active in the SNF sector.

Okay. Okay, that's helpful. And then my second question is, just the -- how do you feel about reimbursements, could you give us an update there? Obviously we've got some clarity in terms of Medicare and some of the therapy cuts this week. In terms of Medicaid, do you feel pretty comfortable with how the outlook is there, if you see--?

I think the -- on a state-by-state basis, we don't have specific issues in any state that are new. I think the broad issue is FMAP, the incremental FMAP dollars that will expire in 2011, and where the stakes are fiscally at that point in time. But, that's really the broad help of a state issue, and we don't really have anything specific. And as you mentioned, on the Medicare front, we think we're going to see some stability for the next couple of years, for sure.

Okay, great. And any comments on the election, any thoughts on the Republicans taking over the House, or--?

The short answer is no. I think it remains to be seen what direction they head, whether it's some form of an attempt to repeal the healthcare reform that's happened, or parts of that. I'm not sure. It didn't affect us a whole lot when it was implemented, in our view, and so I don't know that the repeal has any real effect. And then the broader question is, will there be sort of these across-the-board-type cuts that someone tries to make, and you look at SNFs in particular, and services that are provided, and there's just not a lot of fat there. So I think right now we look at it and feel pretty comfortable with where we are.

Okay, great. Thank you very much.

Thank you.

Thank you. At the moment I have no other questions in queue. (Operator Instructions) I'm showing no further questions from the phone lines.

Great. 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.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may now disconnect.