Omega Healthcare Investors Inc (OHI) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Omega Healthcare Investors first quarter earnings conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Michelle Reiber, please go ahead madam.

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, 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 specifics 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 first quarter is $0.44 per share. The $0.02 decline in adjusted FFO from the fourth quarter is related primarily to the Formation portfolio, specifically for the months of January and February Formation did not pay rent, and as a result Omega did not record income of $1.5 million. The lack of available cash to pay rent in January and February relates to the timing of the Accounts Receivable collection, and certain up front calendar year costs. Rent has been paid for March and April, and it is expected that rent will continue to be paid on a monthly basis. Omega will continue to record Formation rent on a cash basis.

We increased our common dividend to $0.38. This reflects our confidence in the stability of the entire portfolio including Formation on a go-forward basis. Our adjusted FFO guidance for 2011 remains $1.80 to $1.86 per share. This guidance assumes $150 million in acquisitions during 2011. The relatively wide guidance range reflects the uncertainty regarding the timing and ability to close this level of acquisitions. Although the acquisition pipeline is very active, it is likely that if we closed any of these potential transactions they will close in the second half of 2011.

As we previously announced the operations of four Connecticut facilities formerly leased by affiliates of Formation Capital and managed by Genesis, have been taken over by a receiver appointed by the State of Connecticut. The transition of these facilities strengthens the cash flow of the remaining 11-facility portfolio. The ultimate disposition of the Connecticut facilities is unknown, but in all scenarios the outcome of the Connecticut facilities will not reduce our adjusted FFO guidance. We have recorded a $24 million impairment related to these facilities, which reflects the latest Connecticut court ruling to close all four facilities.

On April 28th the Centers for Medicare and Medicaid services issued a proposed rule, discussing two options for the 2012 Medicare skilled nursing facility payment rates. The proposed rule focuses on the parity adjustment for the transition from RUGS III to RUGS IV, with one option for 2012 being a significant reduction in the nursing component case mix index for the 23 RUGS IV rehab categories. The estimated effect is an 11.3% decrease in total Medicare reimbursement.

The second option is a standard market basket increase reduced by the multi-factor productivity adjustment which results April net 1.5% rate increase. We have seen improved cash flow and rent covered ratios as a result of RUGS IV. The proposed adoption of a parity adjustment would reduce coverage ratios at least back to pre-RUGS IV levels, and possibly a bit more due to increased costs. In any event in the worst case scenario, we do not anticipate any specific portfolio issues.

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

Thank you, Taylor and good morning. Our reportable FFO on a dilutive basis was $14.1 million, or $0.14 per share for the quarter, as compared to $33.4 million, or $0.38 per diluted share in the first quarter of 2010.

Our adjusted FFO was $44.4 million, or $0.44 per share for the quarter, and excludes the $25 million provision for impairment, a $3.5 million charge to net income available to common stockholders to write-off 2004 issuance costs resulting from our Preferred D stock redemption, $1.5 million of noncash stock-based compensation expense, $45,000 of acquisition related expenses, $16,000 of interest refinancing expenses, and it also excluded a $230,000 net loss associated with the run-off 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 $70.5 million versus $54.3 million for the first quarter of 2010. This increase was primarily a result of approximately $17 million of revenue associated with the Capital Source acquisitions completed in June of 2010, incremental revenue associated with our capital improvement projects and capital improvements made to our facilities throughout 2010, and $900,000 of mortgage interest income from new mortgages placed in the second half of 2010. These three were partially offset by the $1.5 million decrease in Formation's rent at as Taylor discussed.

The $70.5 million of revenue for the quarter was composed of $65.6 million of cash revenue, and $4.8 million of noncash revenue. Operating expense for the first quarter of 2011 when excluding nursing home expenses, provision for impairments, stock based compensation expense and acquisition deal-related expense increased by $11.4 million as compared to the first quarter of 2010. The increase was primarily the result of additional depreciation expense associated with over $630 million of Capital Source assets acquired in June 2010, as well as additional G&A primarily related to the acquisitions. We believe our 2011 G&A should be approximately $14 million assuming no extraordinary transactions or unusual events.

Interest expense for the quarter when excluding refinancing costs and noncash deferred financing costs was $20 million versus $13.6 million for the same period in 2010. The $6.4 million increase in interest expense resulted from financings related to the Capital Source acquisitions, and the Company taking advantage of favorable borrowing rates in the fourth quarter of 2010.

Turning to the balance sheet in March 2011 we redeemed all of our 8.375% Series D cumulative redeemable Preferred Stock valued at $108.5 million. As a result of the preferred redemption in the first quarter of 2011 we recorded a $3.5 million charge to net income available to common stockholders, to primarily write-off issuance costs associated with the Series D Preferred Stock. During the three month period ended March 31st 2011, under our equity shelf program also known as a continuous equity program, or at the market programs, we sold 1.3 million shares of new common stock generating net cash proceeds of $28.1 million under our dividend reinvestment and common to common stock purchase plan, we issued 800,000 shares of our common stock generating net cash proceeds of $17.5 million.

At March 31st 2011 we had approximately $2.7 billion in gross assets. On the liability side of the balance sheet we had $1.2 billion of debt, and we had $251 million available on our $320 million revolving credit facility. Today we have approximately $260 million in combined invested cash and facility availability. We also have $44 million of shares available to issue under our equity shelf program.

For the three months ended March 31st 2011 Omega's adjusted total debt to adjusted annualized EBITDA was 4.6 times, and our fixed charge coverage ratio was 3.0 times.

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

Thanks Bob, and good morning everyone. As of March 31st 2011 Omega had a core asset portfolio of 398 facilities distributed among 50 third-party operators located within 35 states. Operator coverage ratios increased during the fourth quarter of 2010 as expected. Trailing 12-month operator EBITDARM coverage was 2.1 times for the period ended December 31st, compared to 2 times for the period ended September 30th. Trailing 12-month operator EBITDAR coverage for the period ended December 31st was 1.7 times, compared to 1.6 times for the period ended September 30th. As Taylor previously mentioned, future adjustments to RUGS IV will likely result in pressure upon operator coverage ratios. However, given the portfolio's current strength we do not anticipate any specific portfolio issues.

At this point I would like to turn everyone's attention to a section of our press release referred to as Selected Facility Data, specifically the revenue percent mix. Historically we have provided only two categories private and Medicare, in the press release for the first quarter results and on a go-forward basis, we will be reclassifying our pair mix into three categories. Medicaid, Medicare and insurance, and private and other. Please three categories represent 100% of our operator's revenue sources, and more adequately reflects the quality mix that our operating partners have achieved.

As of December 31st 2010 our operators combined revenue mix for the 12 months ended was approximately 53% Medicaid, 38% Medicare and insurance, and 9% private and other. Said another way our operators derived nearly 47% of revenue from non-Medicaid sources, comparing we feel very favorably to the sector as a whole.

Turning to new investments Omega continues to see a robust pipeline of acquisition opportunities. In addition to our ever-growing capital expenditures programs. As Bob mentioned as of today Omega has $260 million in cash and/or availability to fund new investment opportunities.

Thanks, Dan. We will now open the call for questions.

(Operator Instructions). One moment for questioners to queue. Our first question in queue is Jerry Doctrow with Stifel Nicolaus. Please go ahead.

Good morning. I just had two things I wanted to explore a little bit. One was on the CMS. I mean obviously this is relatively fresh. It sounds like you guys are assuming you will end up with some cuts, some pressure on coverage, any kind of predictions you want to make as to what your, how you think it is going to come out, or what you're sort of anticipating as maybe a most likely case?

Well, I am not sure about the most likely case. What we think about the possibility of a reduction, and we look at the most draconian cut, the 11.3% that has been propose and we compare that to the increases that we have seen, really the issue from a coverage perspective is will our coverages from say from last summer be affected, because we are seeing the improvement coming through our, and that roll back would affect us. The one thing we didn't know although we have some anecdotal evidence that our nursing facilities are taking more complex care patients, and therefore, their expenses are in fact higher. So to the extent that we're incurring higher expenses in our skilled nursing facilities, that would affect our coverage. We don't think it would be meaningful. So if our run rate was 1.6 pre-RUGS IV, I would expect the full adjustment to push us in the 1.6 to 1.5 range, and it would be really expense driven and the complement of patients, is in fact the anecdotal evidence that we are taking more complex care patients in our facilities, true.

Okay. And Taylor, the normal schedule for this year you would expect it to be resolved kind of in August, with a final reg?Is that your assumption?

That would be our view. And we look at the report that came out of CMS, and they had projected that 80% of the patients would be categorized as rehab. You see their actual data that 90% are rehab, so our hope is that with more analysis, we find that the higher reimbursement reflects a higher level of care, and if that is the case I would expect this parity adjustment would be somewhat less than 11%. Maybe we are looking at 4%, 5%, 6%, something like that.

And then on the acquisitions, you said you had a robust pipeline. You talked about $150 million kind of in your guidance. A little more color maybe on what kind of yields you are looking at this standpoint, and are you able to kind of close deals given the RUGS uncertain here, is that why you are talking about the second half, we have just got to wait until this sorts itself out?

Yields have been pushed a lot in terms of expectations, and that has been driven primarily by the Genesis and Manor Care transactions, where a lot of the potential sellers in the market are looking for cash deal from the nines. And frankly there are a couple of super-high quality portfolios that, not big ones, but that are out there that might price at that point, but in light of the RUGS IV uncertainty, and for that matter, Medicaid and some of the pressure there, I think we will see cap rates and yields move back out a little bit. In terms of timing as it relates to the stuff we are looking at, yes, I think to the extent that there are some moving part here, that our expectation is stuff is going to lag out into probably late third quarter, Dan, wouldn't you say?

Yes and as far as future deals, I think we, at this point we have to start underwriting with some Medicare cuts in the analysis.

And yield 9.5 to 10, that kind of in that range, 9.5 to 10.5?

I don't think we will see 10.5. I think its sort of 9.25 to 10.

Okay. Okay. Great. I think that is all for me. Thanks.

Thank you.

Thank you, sir. Our next question in queue is John Roberts with Hilliard Lyons. Please go ahead.

Morning. Following up a bit on what Jerry had to ask. Any particular thoughts on the acquisition front on what type of properties you are looking at? Are you going to stick all with SNFs, or are you looking at other areas?

Our bread and butter has been SNFs, and will continue to be skilled nursing facilities, we have had a couple of opportunities to look at assisted living. We have assisting living and independent,not a lot. We have about a dozen facilities in that category. So but there are a couple of opportunities that we have seen in that category, and some of it is tied to SNF operators, which from our perspective is a great combination, because there is just a nice offset there, and so I don't know, Dan, that we have got two or three that we are looking at?

Yes. There are some small to mid-sized portfolios out there right now that we are looking to bid.

Great. Can you also go a little bit more into the foundation situation, why you are optimistic now on the prospects given your loss in two months paid, and will this two months paid be recovered in the future?

The Formation, well with the turmoil in Connecticut, and just to step back Formation is an independent entity that is managed by Genesis, and the balance sheet is pretty tight in terms of assets versus liability, so the issue isn't necessarily cash flow from the perspective of reported earnings in the base portfolio that remains, but there is an issue in terms of balance sheet movement. So could we potentially see that balance sheet improve, and have that cash from January and February come back to us? Yes. We are not assuming it, we are assuming cash rent on a go-forward basis. We aren't accruing anything.

They are performing at a level to pay the contractual rent, and we think that the balance sheet issue that we saw in January and February in terms of AR growing a little bit, and the payout of insurance and other full year type expenses isn't going to occur again. We feel pretty confident about that. The fact of the matter though is, if there is another blip there isn't a whole lot of balance sheet to protect against the rent stream. But that core base portfolio is in states, and has performed, it is in good states and it has performed pretty consistently, so we feel pretty good about it, carving out Connecticut has helped a lot.

Your believe is that say Formation has more issues, and you have to pull those properties back, it would be easy to release?

For the most part. For the most part. Those properties are in West Virginia, Rhode Island, Massachusetts, New Hampshire an Vermont, and I would tell you that West Virginia, Massachusetts, and New Hampshire are relatively easy states. Vermont is a little bit tougher state and Rhode Island is just interesting, because it is small, you don't have that many operators to go tap into. But those properties do well. So yes if we had to take them back we feel okay about that.

Good. Finally the four properties shall the four Connecticut properties, what do you anticipate will be the work out there?

Well, the State has ruled, the Judge has ruled to close those facilities, and the fact of the matter is without Medicaid rate relief, the opportunities to really generate cash flow out of those facilities are not good, and so I think from our perspective we made the assumption that the properties will be closed. There is a process to go through, an appeal process. There are folks who are interested but at least from our perspective we are planning on the worst and we are hoping for the best, and frankly we don't know where that falls.

Okay. So in other words what may happen is they may not be useful as SNFs anymore, and you might have to repurpose them?

That is true. That is exactly right.

And you would sell them rather than lease them at that point, you think?

Yes. We would be out of our business, so we would look to sell them at that point.

Okay. Great. Thanks.

Thank you.

Thank you, sir. Our next questioner in queue is Tayo Okusanya with Jefferies and Company, your line is now open.

Yes. Good morning, gentlemen. Just going back to the CMS issue when I take a look at the RUGS categories that they are looking to recalibrate and what the new rates versus the old rates would be, it seems like the cut in those categories is much more than the overall 11%. So I was just kind of curious how confident you feel about your coverage really dropping from 1.7 back to 1.6, or whether you think it could go lower than that say to about 1.4, so just given the magnitude of the cuts that are going to be implied that are close to 20%.

Yes. That is a great question, and I think part of the answer is in the fact that 90% of the patients in the actual study were receiving rehab care, and those are the categories being cut.

Right.

So that means that the vast majority of the 11% is spread out in those rehab categories. We haven't seen $100 a day Medicare rate jumps in any of our portfolio.

Okay.

And when you look at those high categories which you are talking about, Tayo you are exactly right, the RUC, the ultra-high C level that is $100 I think a day difference, something like that.

Right.

And if that is where all of our patients were going, if that is where our operators were running we would see that type of rate increase, and we haven't seen that. We have seen $50, $60 a day type Medicare increases in some of our portfolios, and that is being reflected in coverage, and if that gets rolled back it will come out of coverage. So I look at the 1.7, which by the way is trailing 12.

Right.

So it doesn't have a full year RUGS IV. I would look at that 1.7 and go, what if RUGS IV stays in place that is going to go up even more.

More. Yes.

And I think the roll back to 1.6, but maybe 1.5 because we frankly think that there are patients being cared for that are at higher acuity level, and of course have higher expenses, but I don't think it is going possible meaning, I don't see 1.4 from a roll back. Got it. Okay. That is helpful. And then the second thing is from a Medicaid perspective some of the news coming out of Florida that their final Medicaid rule may involve a 6.5% cut in Medicaid, just kind of when you kind of compound that onto the Medicare situation, does that give you some concern about your overall Florida exposure? A little bit. And Lee Crabill, one of our operating executives can talk to us if we need to, but the short answer there is the 6.5 may actually happen, although there is a labor adjustment and, Lee?

That is worth about 2%.

2%. So we are looking at a 4.5% all-in cash reduction.

Right.

That is meaningful. I tell you that Florida within our portfolio performs very well. So again you sort of have 1.6 overall going up beyond that, maybe rolling back with Medicare, but probably not changing, and then the same issue we have always talked about with Medicaid either being 0.1 or maybe even 0.2 at those levels, in terms of reduction in coverage ratios. So it is meaningful. I think on the flip side, at that level you will have the lower quartile type operators really feeling some pain, and there may be opportunities frankly from an acquisition perspective.

But do you cut in some of those low, or those lower quality guys, do you have exposure to any of those names, where you think that you may have to work with them to try to ease their pain?

No.

Okay. So you feel pretty good about just your tenant mix in Florida, and that double whammy of Medicare and Medicaid won't put some of those tenants into some trouble, at least some of their facilities into trouble in that market?

No, we would definitely have individual facilities, but to the extent that they are part of mass releases that all performed well in Florida, I don't see any issues there.

Okay. That is helpful. Thank you.

Thank you.

Thank you, sir. Our next questioner in queue is John Nazareno with Muzinich. Please go ahead.

Yes. Thank you. My questions have been answered.

Alright. Our next questioner in queue is Henry Reukauf with Deutsche Bank. Please go ahead.

Hey Taylor. So just following up op that Florida question. So a 5% cut or a 4.5% cut that you are saying basically 0.1 or 0.2 off of the coverage ratio if that occurred?

Yes. I think that 0.2 is probably a conservative estimate.

Off the Florida portfolio.

Yes. Just the Florida portfolio, and you are saying, and those are operating on balance higher than the overall portfolio? Is that sort of the message you were delivering?

That is correct.

Yes.

Okay. And just on Formation again meant so you I think it was $1.5 million of deferred rent, or rent that you didn't get for two months?

Right. We didn't record anything.

Didn't record any rent. So it is $750,000 a month. With the four facilities to be shutdown, does that rent adjust now down to 750,000?

No.

Is that the relief, or is it just that they don't have the expenses on kind of a negative coverage property?

You got it. They don't have the loss track. Right.

Okay. Can you say where Formation is right now in terms of their coverage?

They are north of 1.0, but it's between 1.0 and 1.25.

Okay. Closer to like 1.0?

Frankly I know it is north of 1.0. It is 1.1 maybe.

Yes. I honestly don't have that right in front of me, and it varies month to month obviously, now that we have just now really rid ourselves of the Connecticut portfolio.

Okay. Alright. Thanks. Those were the two questions I had. Thanks very much.

Thank you.

Thank you, sir. Our next questioner in queue is Todd Stender, Wells Fargo Securities, your line is now open.

Hi, guys. Thanks. Just when you are looking at your acquisition opportunities for this year, can you go into your underwriting of skilled nursing, just on a coverage standpoint, and what kind of haircut you are already assigning to Medicare?

Well, as far as a haircut it Medicare I mean most of the underwriting that we have done to date didn't have a lot of RUGS IV in it because we were working off of 2010 data, to the extent we had fourth quarter that maybe had a little bit, so there was a partial haircut that we would apply there, but for the most part the historical data didn't have a lot of RUGS IV in it anyhow. As far as coverage goes we look 1.25 to 1.35 for stabilized properties.

That is before management.

On a go forward basis I think we are going to be stripping out the lion's share of RUGS IV for the period starting October 1st.

That 1.25 to 1.35 is that after management fee?

Yes. That is after an implied 5% management fee.

Okay. Thanks. Just looking at your line of credit you have got a balance on there. Does that number have to get to a certain threshold before you look to turn that out?

Historically in the $200 million to $250 million range, we are looking at permanent financing, whether it is equity or bonds, so something in that range.

Okay. And just for the ATM program have you issued any shares subsequent to the quarter end?

No. We are blocked out until after our Q is filed.

Okay. Thank you.

Thank you.

Thank you, sir. (Operator Instructions). Presenters, at this time I am showing no additional questioners in the queue. I would like to turn the program back over to Taylor Pickett for any closing remarks.

Thank you for joining the call. Bob Stevenson will be available for any follow-up questions.

Thank you sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may disconnect at this time.