Omega Healthcare Investors Inc (OHI) 2012 Q1 法說會逐字稿

Hello, and welcome to the Omega HealthCare Investors first quarter earnings call and webcast for 2012. All participants will be in listen-only mode. (Operator Instructions). I would now like to turn the conference over to Michelle Reiber. Please go ahead.

Thank youand good morning. With me today are Omega's CEO, Taylor Pickett; CFO, Bob Stephenson; and COO, Dan Booth.

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 conditions 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, EBITDA, and expenses excluding owned and operated properties. Reconciliation 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 Taylor.

Thanks, Michelle. Good morning, and thank you for joining Omega's first quarter 2012 earnings conference call. Adjusted FFO for the first quarter is $0.55 per share. Our strong performance reflects the impact of closing $334 million in transactions during the fourth quarter of 2011, combined with the low cost of borrowing on our line of credit.

We increased our quarterly common dividend to $0.42 per share. The dividend payout ratio is 76% of adjusted FFO. This is Omega's 21st dividend increase over the last 34 quarters..

We've increased the low end of our 2012 adjusted FFO guidance. The revised range is $2.09 to $2.12 per share. This guidance assumes $150 million in acquisitions during 2012. The guidance range reflects the higher cost of debt from our March 2012 bond offering, along with slightly delayed acquisition timing.

During the first quarter, we issued $400 million of 12-year senior unsecured notes at 5.875%. With this issuance of sub 6% 12-year notes, we put our balance sheet in a tremendously strong position with no debt maturities, other than the line of credit, prior to 2020.

Turning to the CMS RUG-IV final rule, our operators have adapted to the rule as we expected. All of our top ten operators had three-month EBITDAR coverage ratios above 1.25 times, with many significantly above 1.25 times. We believe these coverages are at worst sustainable and likely will move up modestly over time.

Bob will now review our first quarter financial results.

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $48.2 million or $0.46 per share for the quarter as compared to $39.1 million or $0.39 per share in the first quarter of 2011. Our adjusted FFO was $56.9 million or $0.55 per share for the quarter and excludes $7.1 million ofinterest refinance costs, $1.5 million of noncash stock-basedcompensation expense, and $105,000 of expenses related to the closing of new investments in the fourth quarter of 2011. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter was $84.5 million versus $70.5 million for the first quarter of 2011. The increase was primarily a result of $9.6 million of incremental lease revenue from a combination of acquisitions completed in the fourth quarter, capital improvements made to our facilities throughout 2011 and lease amendments made during that same time period,$3.8 million of mortgage interest income from new mortgages originated in 2011, and $0.5 million of other investment income related to a $28 million note originated in the fourth quarter of 2011. The $84.5 million of revenue for the quarter includes approximately $8 million of noncash revenue.

Operating expense for the first quarter of 2012, when excluding real estate impairments, nursing home expenses, and stock-based compensation expense, increased by $2.2 million as compared to the first quarter of 2011. The increase was primarily a result of $1.9 million in depreciation amortization expense related to the closing of the new investments in 2011 and a $294,000 increase in G&A resulting from increased costs related to acquisitions completed in 2011 and expenses associated with our seven held-for-sale assets. We project our 2012 G&A to be approximately $14.5 million assuming no extraordinary transactions or unusual events.

Interest expense for the quarter, when excluding refinancing costs and noncash deferred financing costs was $23 million versus $20 million for the same time period in 2011. The $3 million increase in interest expense resulted from financings related to the new investments completed in 2011.

During the quarter, we recorded $7.1 million of interest refinancing expense which was primarily made up of $4.5 million of cash paid to bond holders relating to the early redemption of our $175 million 7% bonds due 2016, and the balance related to tender expenses and the write-off of deferred financing costs associated with the 2006 issuance of those $175 million bonds.

Turning to the balance sheet for the quarter, in March, we issued and sold $400 million 5.875% senior unsecured notes due 2024. Proceeds from this offering were used to tender and redeem our $175 million 7% bonds due 2016 and pay outstanding balances under our credit facility.

During the quarter, we sold two facilities for a total of $14.1 million, generating a $5.3 million accounting gain. Both facilities were sold as a result of exercised purchase options by two separate tenants.

Finally, under our equity shelf program, we sold 249,000 shares of new common stock, generating net cash proceeds of $5.3 million at an average price of $21.38 per share.

Under our dividend reinvestment and common stock purchase plan, we issued 665,000 shares of our common stock, generating net cash proceeds of $14.2 million at an average price of $21.42 per share.

At March 31, 2012, we had approximately $2.8 billion of gross real estate assets. On the liability side of the balance sheet, we had $1.5 billion of debt and we had $448 million available on our $475 million unsecured resolving credit facility.

For the three months ended March 31, 2012, our funded debt to total asset value ratio was 52%, which is well within our maximum of 60%. Our funded debt to adjusted annualized EBITDA was 4.7 times and our adjusted fixed charge coverage ratio was 3.4 times.

I'll now turn the call over to Dan Booth.

Thank you, Bob. Good morning, everyone. As of March 31, 2012, Omega had a core asset portfolio of 428 facilities distributed among 47 third-party operators located within 33 states. Operator coverage ratios dropped off as expected during the fourth quarter of 2011. However, trailing 12-month operator coverages were only modestly affected.

Trailing 12-month operator EBITDARM coverage was 2.2 timesfor the period ended December 31, compared to 2.3 times for the period ended September 30. Trailing 12-month operator EBITDAR coverage for the period ended December 31 was 1.8 times, compared to 1.8 times for the period ended September 30.

While operator top line Medicare revenue dropped in the fourth quarter as expected, operator expense cuts and other mitigants provided for slightly better results than had been previously estimated. As Taylor mentioned, all of our top ten operators produced EBITDAR coverage ratios of greater than 1.25 times for the fourth quarter. In addition to the anticipated changes in operator coverages, there was a slight shift in our operators' revenue mix as a percentage of total revenue.

In the Selected Portfolio Information section of our press release, Medicaid revenue as a percentage of total revenue rose in the fourth quarter to 52.9%,up from 50.5% in the third quarter. This change is not a result of an increase in Medicaid expenses, which stayed the same, but rather the decline in Medicare rates, thus reducing Medicare revenue as a percentage of total revenue.

Turning to our current accusation pipeline. The amount of qualified transactions that we have had an opportunity to review has remained active throughout the first four months of 2012. While no transactions were consummated during the first quarter, we feel confident that our budget acquisition target of $150 million for the year is very achievable. The timing, however, of such transaction closings is difficult to predict. As of today, Omega has its full $475 million revolving line of credit available to fund new investments.

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

(Operator Instructions). Our first question comes from Jeff Theiler at Green Street Advisors.

Hey, good morning. It looks like the Medicare reimbursements for skilled nursing shouldn't really undergo significant cuts this year. More of a market basket update. However, when I look at the long-term, it still seems pretty uncertain to me. You're close to the operators. I would like to get a sense of when you're planning your business, how do you view long-term Medicare and Medicaid rates over the next one to three years or so? What's your baseline assumption, and have you changed that at all in the last year?

Our assumption hasn't changed much in the last year. As you said, the expectation is we'll have the CPI adjuster in October for Medicare. We look forward and assume that ifsequestration happens, there'll be a 2% cut. But even if it doesn't happen, we still pro forma end 2% coming out of Medicare just because that number's out there.

And looking further along, our view is we won't see any significant changes in the RUG system, just because it's working so well in terms of putting patients in the right setting in the low-cost setting for a number of conditions. On the Medicaid side, I think we're going to continue to have what we've seen, which is states struggling with budgets but finding that there really isn't room to make cuts. So we tend to look at Medicaid as just a flat-rate revenue environment overall for the next two, three years. I think you have to plan it that way. Obviously, you get a little bit of creep in coverages if you're not able to enhance your patient mix with the quality patients.

Right. So for Medicaid it's flat. For Medicare, you have the 2% cut coming next year for the sequester, and then over the next one to three years, what's your baseline assumption?

I think from a baseline, if you're trying to be conservative, you just assume flat revenues.

Flat for Medicare as well?

Yes. I think either you have to consider the CPI adjuster as in play every year.

Fantastic. Thank you very much.

Thank you.

The next question from John Roberts at Hilliard Lyons.

Good morning. I'm trying to get my arms around the guidance numbers versus Q1. There seems to be some inconsistency. I'm trying to get my arms around it for modeling purposes. You did $0.55, consensus was $0.50, and the beat was really driven by a much higher revenue number than expected. You annualize the Q1 number, you're coming up with $2.20. You are at $2.09 to $2.12. I'm trying to see where in essence you're coming lower in the out quarters.

There's really three drivers. One is the new debt deal that we did late in the first quarter. We're going to see the full impact of that 5.875% rate versus our line of credit rate, which is much, much lower. The second is, albeit a little bit more modest, is we did sell $14 million of assets that had a 10% return. So that kind of comes out of the equation.

And you have acquisition timing, which would all be upside, but we think that's going to be delayed into more or less the second half of the year if things go well. And then the last piece is we will continue to issue stock via our drip plan. We're not going to turn that off. We'll continue to have some dilution on the equity side from issuing shares. You do all that math, and without anything going the wrong direction, you end up in that range, which is pretty tight.

Okay. You're not going to do any more of the ATM, I figure, right?

We have nowhere to put the cash, so I think doing the ATM would be opportunistic. I think if we saw our stock move in a favorable direction, we might put some cash in the balance sheet. As Dan mentioned, although we haven't closed anything, the pipeline is fairly robust.

On the debt side, you did retire some higher cost debt as well, though, didn't you?

We did. We retired $175 million at 7% debt and we paid down a line, butthe line is at sub 3%.

Bob, you wanted to mention this --

You mentioned the ATM, and it doesn't reflect there, butthe last two days of the first quarter, we did enter into transactions for $10 million or $10.5 million of ATM sales that actually closed in the second quarter, for the T plus 3, so you will see $10 million or $10.5 million of ATM transactions in the second quarter.

That's what, about 500K shares?

That's 510,000 shares.

Great. Is that 665 number you did in the drip, is that pretty consistent quarter to quarter?

That was on the light end. Odds are we'll be a little higher than that. The first quarter was just slight. I would think it's closer to a million shares.

A million shares a quarter.

Yes.

Very good. Thank you.

Thank you.

Our next question comes from Daniel Bernstein at Stifel Nicolaus.

This is Seth Cohn filling for Dan. Good quarter, guys. Just in terms of acquisition activity, you spoke on the call that its timing is uncertain and it sounds like it will be year-end back-dated. Could you provide any commentary on pricing that you're seeing in the market?We see that some of your peers said that some of these transactions are getting delayed because there is uncertainty, and obviously that probably has a negative impact on timing, but what, if any, impact does that have on pricing?

Just to touch upon timing. I think timing is more a function of just the lead time from when you start to talk about a deal to when it closes, all things considered. Usually they're three-party deals and so it's a multi-party negotiation. So there's a good bit of time there. As far as pricing goes, we're seeing the same sort of pricing that you've seen us do deals previously, particularly in the fourth quarter of 2011. I don't think we're moving off that too much. I think that we're still pretty close in that 10% range for the deals that we're currently looking at.

Okay. Thank you. Just curious, you sold two properties in the quarter to operators that had exercise options, purchase options, and I was just wondering if there were any more facilities where the operator holds a purchase options likely to be exercised in the near future and how I should be looking at that going forward, really? I guess the two you did sell to Genesis, which is well-capitalized, are there any more in your portfolio where you see that as likely?

Actually, the two we sold were to other third parties. One was just a stand-alone, as a matter of fact, in Alaska, and another one was just a one-off. No, we don't have material purchase options that are coming up due in the next 12 months.

Okay. Thank you. Lastly, just formodeling purchases, could you provide us with a good run rate for interest expense?

Interest expense is going to be at least another $1.5 million higher than the $20 million that you had this quarter. Primarily, as Taylor mentioned, because of the full impact of the bonds for the quarter versus having it on the credit facility.

Okay. Fair enough. Thanks, guys.

Thank you.

(Operator Instructions). This concludes our question and answer session. I would like to turn the conference back over to Taylor Pickett for any closing remarks.

Thanks, Amy. Thank you for joining the call. Bob will be available for any questions you may have.

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