Omega Healthcare Investors Inc (OHI) 2011 Q3 法說會逐字稿

Good morning, and welcome to the Omega Healthcare third quarter earnings call for 2011. All participants will be in a listen-only mode. (Operator Instructions)

I would now like to turn the conference over to Michelle Reiber. 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 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 identified 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, EBITDA, and expenses excluding owned and operated properties. 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. Good morning, and thank you for joining our third quarter 2011 earnings conference call.

Adjusted FFO for the third quarter is $0.48 per share. For the nine months ended September 30, 2011, adjusted FFO is $1.40 per share. We maintained our quarterly dividend of $0.40 per share. The dividend payout ratio is 83% of adjusted FFO. We increased our 2011 guidance -- adjusted FFO guidance from a range of $1.82 to $1.86 per share up to a range of $1.86 to $1.88 per share. This guidance continues to assume a $150 million in acquisitions during 2011. Year-to-date through September, we have invested $22 million.

On August 16, we entered into a new $475 million unsecured revolving credit facility. In addition to freeing up previously encumbered assets, the credit facility has better pricing and less restrictive covenants than our prior credit facility. It is noteworthy that the credit facility was put in place just a few weeks after the CMS final RUGs IV reimbursement rule was published. We are very appreciative that our credit facility participants were able to quickly understand Omega's continued strong credit profile post the final CMS rule.

Turning to the CMS RUGs IV final rule. As we discussed during our last conference call, we believe our consolidated cash flow to rent coverage will return to coverages we experienced pre-RUGs IV. That is consolidated coverage of approximately 1.5 times to 1.6 times rent. Strategically, we will continue to invest heavily in our capital expenditure renovation programs. In addition, we will look at continuing to strengthen our tenant portfolios via targeted acquisitions and to a lesser extent single non-performing facility dispositions.

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 $44.5 million or $0.43 per share for the quarter as compared to $42.5 million or $0.44 per diluted share in the third quarter of 2010. Our adjusted FFO was $49.2 million or $0.48 per share for the quarter and excludes $3.1 million associated with the write-off of deferred financing credit facility costs, $1.5 million of non-cash, stock-based compensation expense, it also excludes a $148,000 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 was $72.8 million versus $69.7 million for the third quarter of 2010. The increase was primarily a result of $2.3 million of incremental lease revenue from a combination of our capital improvements made to our facilities throughout 2010 and 2011, and lease amendments made during that same period, and $1 million of mortgage interest from new mortgages originated in 2010 and 2011. These two were partially offset by the decrease in other investment income resulting from reduced working capital investment balances. The $78.2 million of revenue for the quarter includes $4.4 million of non-cash revenue.

Operating expense for the third quarter of 2011, when excluding nursing home expenses and stock-based compensation expense decreased by $3.9 million as compared to the third quarter of 2010. The decrease was primarily a result of the first quarter of 2011 impairment of the Connecticut assets, which reduced our depreciation and amortization run rate, partially offset by some depreciation associated with our capital improvement projects.

In addition, we had a decrease in G&A, resulting from smaller bonus and state tax accruals in 2011 versus 2010. We project our 2011 annual G&A to be slightly less than $14 million, assuming no extraordinary transactions or unusual events and will include approximately $300,000 of deal-related acquisition cost.

Interest expense for the quarter, which excludes refinancing cost and non-cash deferred financing cost was $20.1 million versus $19.1 million for the same period in 2010. The $1 million increase in interest expense resulted from financings related to the CapitalSource acquisition.

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. In August, we entered into a new $475 million unsecured revolving credit facility, which matures in August 2015. The 2011 Credit Facility is priced at LIBOR plus an applicable percentage ranging from 225 basis points to 300 basis points and is based on our consolidated leverage.

Our third quarter borrowing rate is 150 basis points better than our second quarter rate under our prior credit facility. On August 30, 2011, our Board approved a $100 million common stock repurchase program. On September 30, 2011, we entered into an open market transactions to repurchase 183,000 shares of our common stock at an average price of $15.96 per share. The settlement of these shares occurred on October 5, 2011.

During the nine-month period ended September 30, 2011, under our Equity Shelf Program, also known as the continuous equity program or At-The-Market program, we sold 1.4 million shares of new common stock generating net cash proceeds of approximately $31.5 million at an average price of $22.16 per share.

Under our Dividend Reinvestment and Common Stock Purchase Plan, we issued 2.6 million shares of our common stock, generating net cash proceeds of approximately $55 million at an average price of $21.10 per share. At September 30, 2011, we had approximately $2.7 billion of gross assets. On the liability side of the balance sheet, we had $1.2 billion of debt and we had $430 million available on our $475 million unsecured revolving credit facility.

For the three months ended September 30, 2011, our adjusted total debt to adjusted annualized EBITDA was 4.3 times, and our adjusted fixed charge coverage ratio was 3.4 times, its highest level in three years. Our new bank covenant, debt to total assets value ratio stands at 46%, which is well within the maximum of 60%.

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

Thanks, Bob, and good morning, everyone. As of September 30, 2011, Omega had a core asset portfolio of 399 facilities distributed among 49 third-party operators located within 35 states. Operator coverage ratios remained stable during the second quarter of 2011. Trailing 12-month operator EBITDARM coverage was 2.3 times for the period ended June 30 compared to 2.2 times for the period ended March 31. Trailing 12-month operator EBITDAR coverage for the period ended June 30 was 1.8 times compared to 1.8 times for the period ended March 31.

Looking at operator coverages for the nine months ended June 30, 2011, which is the period wherein RUGs IV was in effect for the entire period, our operator EBITDAR coverage was 1.88 times, the same as the six-month period ended March 31, 2011.

Adjusting coverages to account for the October 1, a 11.1% Medicare cut drops our overall coverages to 1.52 times on a pro forma basis for the nine-month period ended June 30. Further adjusting coverages to provide for the potential 2% across-the-board provider cuts results in a drop in coverages to 1.45 times. It is important to note that the 2% cut, which would be enacted should Congress fail to reach adequate deficit reduction measures, would not take effect until January 1, 2013.

Additional changes to reimbursement such as additional patient assessment requirements and changes in the utilization of group therapy could put further pressure on operator revenue. However, following management's discussions with nearly all of our major tenants, and many of our smaller tenants, we believe our operators have already taken many of the steps necessary to mitigate the additional changes in reimbursement and should also help partially offset the 11.1% cuts.

Turning to our major tenants specifically, our top 10 operators represent approximately 74% of Omega's contracted revenue with remaining 39 tenants representing the other 26%. For the nine-month period ended June 30, our top 10 operators had a rent coverage ratio of 1.94 times, pro-forming in the 11.1% and 2% cuts, results in coverages for our top 10 operators of 1.58 and 1.52 times respectively.

Further nine out of our top 10 operators had coverage ratios in excess of 1.3 times after both the 11.1% and the potential 2% Medicare rate cuts. The remaining tenant has a coverage above 1-to-1 for the nine-month period ended June 30, and a coverage ratio of north of 1.2 times for the three months ended June 30 after pro-forming in the cuts.

In summary, while the 11.1% cut, the changes to patient assessments and group therapy and the potential for an additional 2% cut in 2013 will assuredly reduce coverage ratios in the fourth quarter of 2011 and beyond. We believe that rent defaults are extremely unlikely, given our operators' expected coverages post cuts, as well as the mitigating measures currently being implemented by virtually all of our tenants.

Turning to portfolio developments. In the second quarter of 2011, we reported on the execution of definitive lease documents with subsidiaries of Genesis HealthCare for the lease of 12 skilled nursing facilities currently leased to FC/SCH. The effectiveness of the lease was subject to the approval of various [channels] in the five states wherein those facilities are located. It is now expected that that those [channels] will be completed by year-end, and that the Genesis lease will become effective on January 1, 2012.

Turning to new investments, effective October 31, Omega completed a $69 million investment with affiliates of Persimmon Ventures, LLC and White Pine. The transaction involved a purchase/leaseback of three skilled nursing facilities, two in Maryland and one in West Virginia, and mortgage financing on three additional skilled nursing facilities, all located in Maryland.

In addition, within the next several months, Omega anticipates taking title to and leasing of third facility in Maryland. The closing of that transaction is subject to, among other things, the completion of a major renovation project and represents an additional investment of $17 million. The overall combined transaction, including the aforementioned third-party Maryland lease facilities totaled $86 million, consisting of $56 million in cash and $30 million in assumed HUD indebtedness, with a combined initial annual yield of approximately 10%. The combined transaction includes seven facilities located in two states with 938 beds. In addition to the Persimmon, White Oak transaction, we continue to see a healthy supply of new investment opportunities.

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

(Operator Instructions) Todd Stender, Wells Fargo Securities.

Hi, thanks. Just how many of the four Connecticut facilities are for sale? Is it all four?

Yes, all four.

Okay. And they're not reflected on the balance sheet for held for sale as of September?

No, they're not. They're in land and building. Now they will be moved to held for sale during the fourth quarter. So actually three of them [received back], as you read in the press release. The fourth one we get back by close of business today. All are empty and will not be used as skilled nursing facilities and are all actively being marketed for sale.

Okay. So if they're not skilled nursing facilities, I guess what kind of initial lease yields do you expect on the sales? If they are vacant now and there could be alternative uses, what kind of pricing do you expect?

We frankly don't know. We're carrying the assets at fairly modest values on the books, I think what's the combined assets.

A couple of million dollars.

We have a couple of million dollars on the books attributed to these assets. They are being actively marketed for redevelopment. And we've had some discussions for a couple individual buildings in the $1.5 million to $2 million range, so (inaudible) I mean, it's a long process.

Okay, thanks. And the pricing on the new acquisitions, the stuff with your new tenant. The two facilities in Maryland, one in West Virginia and I think there's a third Maryland facility. What kind of pricing were those acquired at?

Well, all in transaction's $86 million for -- is it 938 beds, Dan?

Yes. And the initial annual yield is approximately 10%. That's cash, not GAAP.

Okay. And can you tell us a little bit about Persimmon Ventures?

It's a local Maryland company, it's private. They've been in business for a number of years. They're well respected, well regarded and we've -- but we worked out our mutually beneficial transaction for both parties.

Okay, thanks. And just on your share buybacks, do you look at particular valuation methods? How do you determine the return you expect on those repurchases?

The -- as you would note from our press release and Bob's discussion, we did a modest buyback at less than $16 per share. And frankly in that range, when you look at $1.60 dividend, 10% yield at $16 per share, sort of south of $16, it's just an allocation of capital question. Are you more comfortable buying back the credit, our stock versus a transaction for our skilled nursing facility. So in that price range, if we're electing to allocate capital, we're going to have a strong inclination to go with that direction in north of $16, it's just a question of what your other opportunities are.

Okay, great. Thank you.

Tayo Okusanya, Jefferies & Company.

Hi, yes. Good morning. Congratulations on a very solid quarter. Couple of questions. In regards to the acquisition that was done in third -- in October, the cash yield is 10%. One, could you give us what the GAAP yield is? And then second of all, just going forward and it was actually acquisition outlook, could you talk a little bit about that and how you'd go about underwriting the potential reimbursement risk associated with skilled nursing?

Sure. I'll let Dan to take up the future acquisitions. From a GAAP yield perspective, it's about 11%, Tayo.

Okay. And then, Dan?

Future acquisitions, I mean, obviously, we're factoring in Medicare cuts both the 11.1% for sure and others depending on the specific acquisition. But we also are factoring some (inaudible) to the extent they can be explained and we can see them. A lot of these cuts as I indicated already -- have already taken place. So actually some cost cutting efforts are already running through some of the financial statements.

That being said, I think our outlook for 2011 was $150 million worth of acquisitions and we did some of that obviously in October, but we're not changing our guidance, we expect to at least meet that hurdle. Overall, the prospect for new deals is pretty bright right now. Once again, you just have to factor in the changes going on with the rates, etcetera. And you have to have faith that your operators are going to take the right steps to mitigate these cost cuts.

Got it. Okay. Are you guys having anything out of this lobbyists or whoever have you in regards to the progress Super Committee is making and what ultimately could come out of that?

No. I would characterize it as, we've heard 10 different ideas that have gone into the committee and no clear sense of what's going to come out of that committee. And obviously, the speculation is no matter what comes out of the committee, it's likely not the matter because Congress is never going to get -- never going to pass anything. So that's why we've taken the view of 2% beginning 2013 and until we get -- until any of us get a little more clarity on what actually will come out of that committee as you could throw anything in the -- there's the idea of doing away with the reimbursement of bad debt. I mean, there's a whole gamut of things that have been tossed out there.

Okay. Helpful. Thank you.

Thank you.

(Operator Instructions) Jerry Doctrow, Stifel Nicolaus.

Thanks, and good morning. A number of things have been asked. I wanted to just touch on two items. One, I was curious as to whether your regional operators are pursuing kind of home health, hospice, I mean that seems to be sort of a very much favor among the bigger operators and I guess -- is your view that it sort of helps your buildings -- [virtue] buildings, you're kind of indifferent?

I think having the right home health and hospice programs is definitely a plus. And we have a couple larger regional operators that have -- follow the patient home program and hospice programs. And I think you'll see more of that particularly among the 20 plus facility type chains that have a regional presence just because it's a natural fit. And frankly, it's not incredibly capital intensive to do. So I think we'll see that as people think about ACOs, it sort of fits into the whole managed care, accountable care type future that everybody thinks we're going to see. So our more sophisticated guys have the programs. And I think you'll see it -- you'll see it pop up a little bit more and people have enough presence, if you have 15 or 20 buildings in a state we can do it.

Okay. And, Taylor, you certainly indicated that the lease coverage and some confidence now that you are beginning to see some mitigation. Kind of two questions. One is, any expectations either because you got lease renewals and that sort of thing that you'll see, even a few here or there properties that you have to renegotiate or where you might get a tenant walking away?

We have very few renewals, but even if we had renewals, as I look throughout the portfolio, we haven't identified one portfolio that we look at out of all of our, we haven't identified a single one where we think a tenant would be able to come to us and say, we need to renegotiate this lease, as a result of RUGs IV and otherwise -- state or otherwise. So, we feel highly confident today in terms of where our cash flow sit and obviously we paid a lot of attention to what the future is although our general sense is, there's not much left on the Medicare front and Medicaid, we've heard very little out the states post this last round.

Okay. And I know it's still early, but any color on sort of what kinds of things you were doing to deal with the mitigation or --?

Well, I mean, I think there's a kind of a broad array of things that people are doing. Obviously, they're having to manipulate the way they do therapy in many instances that involve third-party vendors and talking to, and redoing their contracts with therapy companies that really expands upon a number of other third-party contracts that they're having and how they look at those, there is -- to the extent there is overhead that can be cut, we're looking at that. I think, you really run the whole gamut, I think, this was a painful process, but some of them have actually stepped back and found it to be somewhat helpful and that they re-looked at every single solitary line item within their expenses and identifying things where things could be -- things could be trimmed. So, those are the main ones, but it's really across the whole gamut.

The only comment I'd make in addition to that is, the one thing that we haven't seen -- where we haven't seen cuts is direct patient care. I mean, there's a sense that there really isn't room there. So you're seeing it in the non-patient care categories and in regional management teams as well.

Okay. All right, great. Thanks.

(Operator Instructions) We show no further questions. This concludes our Q&A session. I would like to turn the conference back over to management for any closing remarks.

Thank you, and thank you for joining our third quarter call. Bob Stephenson will be available for any follow-up questions you may have.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.