Omega Healthcare Investors Inc (OHI) 2012 Q2 法說會逐字稿

Good morning, and welcome to the Omega HealthCare investors' second-quarter earnings call and webcast for 2012. Our participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Michelle Reiber. Please go ahead.

Thank you, and 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 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 recent report on form 10-K, which identify 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 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 Pickett.

Thanks, Michelle. Good morning, and thank you for joining Omega's second-quarter 2012 earnings conference call. Adjusted FFO for the second quarter was $0.53 per share, a 13% increase from the second-quarter 2011 adjusted FFO of $0.47 per share. Our performance is consistent with the first-quarter adjusted FFO of $0.55 per share, when you take into account an additional $1 million of interest expense from our late first-quarter bond offering, and $2 million additional weighted-average shares. In other words, the $0.02 decline in adjusted FFO is caused primarily by capital market transactions.

We maintained our quarterly dividend of $0.42 per share. Our dividend payout ratio is 80% of adjusted FFO. We've increased our 2012 adjusted FFO guidance to a revised range of $2.12 to $2.15 per share. This guidance continues to assume $150 million in new investments during 2012. Through June 30, we've made new investments of $46 million. The acquisition pipeline continues to be active.

During the quarter, Fitch ratings initiated coverage of Omega, with a BBB-minus investment grade rating on our senior unsecured notes. We now have investment grade ratings from both Fitch and S&P. With two investment grade ratings, our pricing on our unsecured line of credit drops by 65 basis points.

Bob will now review our second-quarter financial results.

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $55.8 million or $0.53 per share for the quarter, as compared to $42.6 million or $0.42 per diluted share in the second quarter of 2011. Our adjusted FFO was $55.7 million or $0.53 per share for the quarter, and excludes a favorable $1.7 million interest refinancing cost adjustment, offset by $1.5 million of non-cash stock-based compensation expense and $98,000 of expenses related to the closing of new investments. Further information regarding the calculation of FFO is including in our earnings release and on our website.

Operating revenue for the quarter was $83.8 million versus $72.6 million for the second quarter of 2011. The increase was primarily a result of $7.4 million of incremental lease revenue from a combination of acquisitions completed in the second half of 2011; capital improvements made to our facilities throughout 2011 and 2012; and lease amendments made during that same time period -- $4 million of mortgage interest from new mortgages originated throughout 2011, and $0.5 million of other investment income related to a $28 million note originated in December. These three were partially offset by a $700,000 reduction in lease revenue related to one operator whose revenue is recorded on cash basis, and is anticipated to be current in the third quarter.

The $83.8 million of revenue for the quarter includes approximately $8 million of non-cash revenue. Operating expense for the second quarter of 2012 -- when excluding nursing home expenses, provisions for uncollectible accounts receivable, and stock-based compensation expense -- increased by $2.5 million as compared to the second quarter of 2011. The increase was primarily a result of $2.4 million in depreciation and amortization expense related to the closing of approximately $370 million of new investments since July 1, 2011.

From a G&A standpoint, we project our 2012 annual G&A expense to be approximately $14.5 million, assuming no extraordinary transactions or unusual events. Interest expense for the quarter, when excluding refinancing costs and non-cash deferred financing costs, was $24 million versus $20 million for the same period in 2011. The $4 million increase in interest expense resulted from higher debt balances associated with financings related to the $370 million of new investments completed this July 1, 2011, and includes a full quarter of interest associated with the $400 million 5.875% bonds due 2024 that were issued in March 2012, offset by interest related to the March redemption of our $175 million, 7% bonds due 2016.

Turning to the balance sheet for the year, on June 29, we paid $11.8 million to retire four mortgage loans guaranteed by HUD. The loans were assumed as part of the December 2011 purchase of 17 SNFs, and had a blended interest rate of 6.49%. The payoff resulted in a $1.7 million gain on the extinguishment of the fair value of debt. During the second quarter, we sold three held-for-sale facilities for total cash proceeds of $7.9 million, and recorded a $2 million accounting gain.

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 a credit facility. For the six-month period ended June 30, 2012, under our Equity Shelf Programs, we sold 759,000 shares of new common stock, generating net cash proceeds of $16.1 million at an average price of $21.27 per share.

Under our dividend reinvestment and common stock purchase plan, we issued 3.2 million shares of our common stock, generating net cash proceeds of $69 million at an average price of $21.52 per share. For the three months ended June 30, 2012, our funded debt to total asset value ratio was 50%, which is well within the maximum of 60%. Our funded debt to adjusted annualized EBITDA was 4.5 times. And our adjusted fixed-charge coverage ratio was 3.3 times.

I'll now turn the call over to Dan.

Thanks, Bob, and good morning everyone. As of June 30, 2012, Omega had a core asset portfolio of 433 facilities distributed among 47 third-party operators located within 33 states. Operator coverage ratios dropped off as expected during the first quarter of 2012. However, trailing 12-month operator coverages were only modestly affected. Trailing 12-month operator EBITDARM coverage was 2.1 times for the period ended March 31, compared to 2.2 times for the period ended December 31, 2011. Trailing 12-month operator EBITDAR coverage for the period ended March 31 was 1.7 times, compared to 1.8 times for the period ended December 31, 2011.

As discussed previously, this drop in overall operator coverages is an expected temporary trend, as previous quarters benefiting from RUGS IV drop off and are replaced by results which are affected by the 11.1% Medicare rate cuts.

While we anticipate modest reductions in coverage over the next two quarters as the RUGS IV results continue to drop off, we fully expect overall operator coverages to remain strong and comparable to historical coverage ratios, pre-RUGS IV implementation.

Turning to new acquisitions. In the second quarter, we completed two separate investments involving two of our existing operators. On June 29, Omega purchased for SNFs in Indiana for $21.7 million. The four facilities were added to an existing master lease with the Health and Hospital Corporation of Marion County. The four SNFs have 383 beds. and generate an initial annual cash rent of $2.17 million.

The second acquisition involved the purchase of a single SNF located in Indiana for a total of $3.4 million. The 80-bed single-asset facility was added to an insisting master lease, and generates an initial annual cash rent of $340,000. Year to date, Omega has completed $46 million in new investments, including capital expenditures.

While difficult to predict the timing of transaction closures, we fully anticipate achieving, and possibly even exceeding, our investment guidance of $150 million for the year. We currently have our entire $475 million revolver available for new investments.

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

(Operator Instructions). John Roberts, Hilliard Lyons.

Good morning. On your acquisition run rate, you said $150 million for the full year. Do you feel pretty decent about that? What's your pipeline look like? And what's the acquisition environment at this point?

The acquisition environment is actually pretty bullish at this point. We feel very good about the $150 million, as I indicated. I think we'll -- I feel very good that we'll meet it, and will very likely exceed that number for the year. There's a number of deals out there. I think the biggest issue is more timing than crossing the finish line.

And what timing are you looking at? Is it more liable to be back-end loaded, or do you have a lot on the plate to go right now?

There's such a lead time in these deals, believe it or not; and, as you know, we've done some deals, historically, where we have also assumed some HUD debt, which adds to that lead time. So it's hard to predict. But I would have to say, at this point in time, that it's -- although it's spread out over the six months, it's probably back-ended.

Okay. Cap rates?

It's much like you saw in 2011.

I'm sorry?

Much like we showed in 2011, where we had a number of deals at the end of the quarter.

All right, very good. Cap rates -- were the property acquisitions you made in Q2 pretty consistent with what you're seeing now?

Yes, they are.

And what about dispositions?

We have a couple of assets that are empty, unlicensed facilities that we'll dispose of, but it's -- what is it, about four assets?

Yes, there's three assets left.

But that had no financial impact, I take it?

Only the modest impact of adding a little cash to the balance sheet.

Right. All right, very good. Thanks, guys. Nice quarter.

James Milam, Sandler O'Neill.

Hey, good morning, guys. Just quickly -- can you just clarify for me -- the $46 million of investments year to date, about $25 million of that was acquisitions, and the rest was through the CapEx program? Is that correct?

That's correct.

Okay, thanks. And then, Bob, on the $700,000 of cash rent that you -- that's on a cash basis, is that an incremental increase to the revenue line in the third quarter, then?

Assuming the operator follows through on their commitment to catch us up, yes.

And then that would be a run rate, going forward?

No. They basically missed the second quarter, so if they catch us up in the third quarter, as they've indicated, we'll have a bump in the third quarter and then it would (multiple speakers) normalize back out.

Okay, so that's the 700,000 that was kind of a decrease in the second quarter?

Yes, that's correct.

Okay, got it. Thanks. My third question is, can you walk through sources and uses in the second quarter; and, then, how you're thinking about them going forward? It just looks to me like you had the asset sale and you raised some equity through the DRIP and ATM. But with the debt repayments and the acquisitions, I guess I'm just curious how the balance sheet was funded; and then what your guys' anticipation is going forward, especially with regards to additional equity.

Right now, the revolver is fully available, all $475 million. And that was our goal -- given the fact that we have a lot of activity in the pipeline -- is to have been revolver fully available. So in terms of sources, we'll use the revolver to fund acquisitions. And then, depending on how quickly they come along in both dollar amounts and when they cross the finish line, then we'll get some amount of equity, in all likelihood, to take that down. But with one $475 million available, you can run a lot onto that revolver without having to go to the equity market. And then, I think any equity we do is going to be through our at-the-market program and through our optional DRIP plan.

Okay.

Consistent with what you saw.

Okay, no, that makes sense. And then in the quarter, the debt repayments and the acquisitions -- those were funded partially with the ATM. And then what was -- just cash from operations? Is that the other source?

That's correct.

Okay, great. And then, Taylor, my last one is bigger-picture. And, Dan, maybe you can speak about this as well. But as you look out towards the end of the year, obviously, you guys are very bullish on the potential for new deals. But I'm just curious if you're seeing any sellers, such that may be smaller or private owners, that are becoming more interested in selling assets in advance of any potential tax law changes, or if you're not really seeing anybody change their behavior based upon that?

I haven't actually seen any changes in behavior (technical difficulty) small guys wake up in October and come to us. But I haven't done any really dramatic shift in what we're seeing out there.

We've had some -- yesterday we had a preliminary discussion about a modestly sized deal where the discussion was, we want to close by year-end for taxes. But it's the first time that specifically came up in what we've been doing the last few months.

Okay, great. Thank you, guys.

Tayo Okusanya, Jefferies.

Yes, congratulations on a good quarter. A couple of questions -- it's now past July 1. Just kind of curious, with fiscal year 2013, what you're hearing in regards to Medicaid rates in some of the key states that you guys have a presence in?

Our general sense is what we've talked about, is generally stability on the Medicaid side and the Medicare site. Frankly, there are no states we're looking at today where we have a major concern. I think -- Dan, do you have any?

I think that's right, yes. Other than what we've been seeing in the past on certain states; but for the most part, we've exited those states. So there are no concerns on any specific states right now.

Okay, there so there's no states that you're looking at for like a 5% or 10% cut or anything of that nature?

No, no.

Okay, that's helpful. And then on the acquisition front -- again, this is kind of like the second year where your acquisitions have really been back-weighted. I'm just kind of curious, is there any kind of reason why that tends to happen? And would you expect that to also happen in 2013 as well, where you have this rush of acquisitions between now and the end of the year, and then things kind of cool off again?

I think it's just a coincidence. It's just a timing issue, and that there's a lot of lead time a lot of these deals. And we certainly don't plan it that way.

Okay.

Is not seasonal on purpose.

That's exactly what I wanted to hear. Appreciate it, guys.

(Operator Instructions). James Milam, Sandler O'Neil.

Hey, guys. As long as we're all still here, will you just give us a little more color on that tenant, and the reason behind them missing their payment in the second quarter? And if that's specific to that tenant, or something broader? Just a little background for us, please.

Totally specific to the tenant. The coverages, from an operating perspective, are fine. But the tenant has a stressed balance sheet, which they've had for a while. And they took -- they funded electronic medical records in all of their buildings with the excess cash flow that would otherwise go to pay rent. It's not a great choice from where we sit; but, from a forward-looking perspective, probably the right thing to do. And again, so it is specific to that tenant; the coverages there. We fully expect them to catch up our payment. But until we receive it, we're not going to book revenue.

Got it. And I guess, do you guys have any -- did they have a conversation with you about that investment, and then the subsequent shortfall? Or is it kind of -- catch you a little by surprise, and then you have a conversation with them about, don't let it happen again? Something like that?

It was more of the latter. I think they felt like they could manage their cash and would be able to make their rent payment. It's in the state of Arizona; their Medicaid payments were slowed down, and they were stuck. But again, they should have come to us, obviously. And they got themselves in a box, and now we're working through it.

Understood. Thanks for the color, guys. Appreciate it.

Dan Bernstein, Stifel Nicolaus.

Good morning. I thought I was being ignored, but I think I hit seven-one. Just on the pipeline, I just wanted to go more into the motivation of the seller. Do you think the Genesis-Sun announcement helped thaw the market? Or is there some other motivation -- aside from the capital gains tax issue -- that is motivating sellers to maybe approach you to sell their assets to you?

I don't think the Sun-Genesis transaction has driven any of the other activity in the pipeline that we are seeing. I think it's just a continuation of the sophistication required to run this business profitably. We've had the changes in Medicare; now we're seeing accountable care organizations come into a bunch of states; we're seeing states think about how to deal with dual eligibles, all requiring additional sophistication. And so it's just a continuation of what we've seen from the last six or seven years, as the less sophisticated operators are looking for ways to exit. The more sophisticated operators are the ones that can be profitable. And then, of course, you have the inevitable personal timing issues -- folks who have bought assets that were underperforming and turn them around, and have decided to monetize. That's really what we're seeing, I think pretty consistently, Dan.

Yes, that is.

And are these marketed mortgage transactions, or folks just approaching you privately?

Yes, the deals that we end up with are almost always deals that people have approached us privately.

Okay. And then one last question on that pipeline, is it mainly property acquisitions? Or are you also getting proposals for mortgages; loans; redevelopment, or development of assets? I'm just trying to understand the tilt of that acquisition pipeline.

The lion's share is acquisitions, sale-leaseback types. We see a smattering of mortgages and a little bit of new construction, but that's really with our existing operator base.

Okay.

And pretty limited.

And small, compared to the overall.

Okay. Maybe one last question. In terms of the size of the portfolios, are you seeing any differences with what you're seeing today versus what you've historically seen? And do you think there are any large portfolios out there that might be attractive?

Our deal size is all over the place. We haven't done any gigantic deals, but we're seeing deals that range from -- obviously, we did a $3.4 million deal in the first quarter. And we're looking at deals that are $100 million-plus right now. So they're all over the place.

But typically -- the typical size for what you've done in the past.

That would be correct.

Okay. Thanks it for me today. Thank you very much.

John Roberts, Hilliard Lyons.

Following up on Dan's line of questioning -- in listening to various people in the industry, I've typically heard that sellers have been very reticent to sell; and that they were asking, basically, too much for properties. Are you seeing sellers become a little bit more realistic in what they're asking for, and a little bit more realistic in their willingness to sell?

Yes, our pipeline would be an indication of that, where it's pretty active. We haven't changed our underwriting standards or our view of the economics. So the fact that our pipeline is a lot more active -- to me, indicates that sellers have become more realistic, in terms of value.

Basically they're coming down with what they're willing to ask. And it's coming into your sweet spot, so to speak.

For right now, yes.

Great. Okay, thanks. That's it.

(Operator Instructions). Showing no further questions, we will conclude the question-and-answer session. And I would like to turn the conference back over to Taylor Pickett for any closing remarks.

Thank you for your help today, Laura. Thank you for joining the call. Bob will be available for any follow-up questions you may have.

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