Omega Healthcare Investors Inc (OHI) 2012 Q3 法說會逐字稿

Good morning and welcome to the Omega Healthcare Investors, Inc., third-quarter earnings call for 2012. (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 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, FAD, and 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 Taylor.

Thanks, Michelle. Good morning and thank you for joining Omega's third-quarter 2012 earnings conference call.

Adjusted FFO for the third quarter is $0.54 per share, a 13% increase from the third quarter of 2011 adjusted FFO of $0.48 per share. Normalized funds available for distribution, FAD, for the quarter is $0.47 per share.

We anticipate fourth-quarter adjusted FFO to be $0.54 to $0.56 per share and FAD of $0.49 to $0.50 per share.

We increased our quarterly common dividend to $0.44 per share. This is a 4.8% increase from the last quarter and a 10% increase from the third quarter 2011. The dividend payout ratio is 81% of adjusted FFO. We've increased our 2012 adjusted FFO guidance to a revised range of $2.15 to $2.17 per share.

Through September 30, we have made new investments of $258 million. The acquisition pipeline continues to be active. Bob will now review our third-quarter financial results.

Thank you, Taylor, and good morning.

Our reportable FFO, on a dilutive basis, with $56.7 million, or $0.52 per share, for the quarter, as compared to $44.5 million, or $0.43 per share, in the same quarter of 2011. Our adjusted FFO was $58.7 million, or $0.54 per share, for the quarter and excludes $1.5 million of non-cash, stock-based compensation expense and $483,000 of expenses related to the closing of new investments. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter was $87.1 million versus $72.8 million for the third quarter of 2011. The increase was primarily a result of $9.5 million of incremental lease revenue from a combination of acquisitions completed since September 2011; capital improvements made to our facilities throughout 2011 and 2012 and lease amendments made during that same time period; $4.1 million of mortgage interest from new mortgages originated in late 2011; and $900,000 of other investment income related to a note originated in December of 2011.

The $87.1 million of revenue for the quarter includes approximately $7.9 million of non-cash revenue. We'd expect the non-cash revenue component to decrease by approximately $1.5 million in the fourth quarter.

Operating expense for the third quarter of 2012, when excluding nursing home expenses, acquisition-related costs, and stock-based compensation expense, increased by $4.2 million as compared to the third quarter of 2011. The increase was primarily a result of $3.4 million in depreciation and amortization expenses related to the closing of approximately $575 million of new investments since October 1, 2011.

From a G&A standpoint, we project our 2012 annual G&A expense to be just under $15 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 new investments completed since October 1, 2011.

Turning to the balance sheet for the year, on June 29, 2012, 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 early extinguishment of the fair market value of debt recorded in the second quarter of 2012.

During the third quarter, we sold one held-for-sale facility for total cash proceeds of $2.3 million, and recorded a $1.7 million accounting gain.

In March, we issued and sold $400 million of 5.875% senior, secured -- or unsecured, excuse me, notes due 2024. Proceeds from that offering were used to tender and redeem our $175 million, 7% bonds due 2016, with the balance used to pay off credit facility debt.

For the nine-month period ended September 30, 2012, under our equity shelf programs and our dividend reinvestment and common stock purchase plan, we issued a combined 8.2 million shares of our common stock, generating net cash proceeds of $186 million at an average price of approximately $22.70 per share.

For the three months ended September 30, 2012, our funded debt to total asset value ratio was 48%, 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 3.5 times. I'll now turn the call over to Dan.

Thanks, Bob, and good morning.

As of September 30, 2012, Omega had a core asset portfolio of 460 facilities distributed among 47 third-party operators located within 33 states.

Operator coverage ratios dropped off as expected during the second quarter of 2012; however, trailing 12-month operator coverages were only modestly affected. Trailing 12-month operator EBITDARM coverage was 2 times for the period ended June 30, compared to 2.1 times for the period ended March 31, 2012. Trailing 12-month operator EBITDAR coverage for the period ended June 30 was 1.6 times, compared to 1.7 times for the period ended March 31, 2012.

As discussed previously, this drop in overall operator coverages is an expected temporary trend, as previous quarters benefitting from RUGS IV drop off and are replaced by results which are affected by the 11.1% Medicare rate cuts. While we expect this trend to continue for the third quarter, we ultimately expect overall operator coverages to remain strong and comparable to historical coverage ratios, pre-RUGS IV implementation.

Turning to new acquisitions. In the third quarter, we purchased an investment with one of our current operators -- we completed an investment with one of our current operators. On August 31, 2012, Omega purchased 27 facilities, which include five campus locations in Indiana, for $206 million. The 27 facilities were added to an existing master lease with the Health and Hospital Corporation of Marion County. The 27 facilities consist of 2,310 SNF beds, 323 ALF beds, and 259 independent-living garden apartments, and generating initial cash rent of $22.6 million.

Year to date, Omega has completed $258 million in new investments with a combined cumulative return in excess of 10%, including capital expenditures. While difficult to predict the timing of transaction closures, we currently have a robust pipeline. We currently have $375 million of our revolver available for new investments.

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

(Operator Instructions). John Roberts, Hilliard Lyons.

Good morning. Did you offer any -- I may have missed this, but did you offer any financial metrics on the Health and Hospital acquisition, cap rates, et cetera?

Well, we mentioned that the initial cash yield was $22.6 million on a $206 million purchase price. That includes a little bit of a [LAN]. So you're talking about 11% return.

11%. Okay. And are there bumps on that?

There are 2% bumps.

Annual?

Annual.

And for how long?

Through the term of the lease, which is 10 years.

10 years. Great. Okay. Thank you.

(Operator Instructions). Rob Mains, Stifel Nicolaus.

Yes, thanks. You mentioned HUD in the prepared commentary. I know that they've been kind of giving away money, it seems. Are they -- has HUD emerged as sort of a competitor in terms of a capital source for operators or are you still mostly seeing other REITs, private equity, that sort of folks out there?

I think HUD, to some degree, has always been a competitor. It just depends on -- we provide, obviously, 100% financing, whereas HUD provides something significantly less, whether it's 70% or otherwise. So the metrics are a little bit different when people are out shopping for deals and money.

And when you look at your capital structure, I mean, I've heard of sub-3% rates that are out there. How do you weigh that against -- that the ratings agencies don't like secured debt?

Rob, we've tended to keep the secured debt down to a percentage that the rating agencies can live with, and we've basically said we want to be under 20%, and where are we, Bob?

About 14%.

14%. So it's a little bit of a balancing act, and frankly, because we are a qualified HUD lender, either there are assets out there that have HUD debt that would need to be assumed because of lockouts or otherwise. It puts us in a competitive advantage to leave ourselves a room to do those types of deals. So when you see us add HUD, in all likelihood you will and it will be part of a transaction structure.

Okay. And could you just talk about whatever you can about the size of the pipeline, because it seems that with some of your peers not doing SNF deals, it would seem that your pipeline of at least available opportunities must be growing.

The pipeline is active, and we've said that throughout this year, and we had commented we are confident that we would hit our guidance of $150 million. And we see a similar pipeline today that we saw throughout the year.

So without getting into specifics with numbers and timing, it's still active and it's the same as it's been throughout the year, and obviously we've exceeded our projection for the year to date.

Okay. Very good. Thank you.

Lee Brown, Visium.

Thanks for taking my call. Just a quick question on operator coverage. If you were to annualize it just for the latest quarter -- so instead of looking at it on an LTM basis for that 1.6 times coverage after fees, where does that change to?

You know, we report on trailing 12 months, historically. And so, there is so much choppiness in any given quarter, we don't isolate it down to the quarter. We think that the trend has basically flattened out at this point, so we don't see it going much below the 1.6 trailing 12 months that we have today.

Got you. And just one quick follow-up. In terms of the top operators there that you break out prior to the 37, what's -- without naming the specific entity, what's the lowest coverage ratio on a trailing 12 month basis? (Multiple speakers)

All of those operators -- I mean, we've talked about this before when we stratify. They're all above 1.25, except for one. There's one operator who has purposely spent money in a state to make some changes that will affect their future rate. So frankly, on a pro forma basis, we are looking at north of 1.25 throughout that top 10.

Perfect. That's very helpful. Thank you so much.

(Operator Instructions). Seeing that there are no other questions, this concludes our question-and-answer session. I would like to -- just one moment. We have a question from Jeremy Metz, Deutsche Bank.

I just wanted you to talk a little bit more about the deal you did complete this quarter, just a little more detail as to how long that's been in the works and are there other such opportunities with some of your existing operators out there to do such deals going forward.

The deal that we just did was with an entity that we had already had leases with. We were familiar with them. And it had been in the works for a number of months.

And most of our deals, as we've always said, are coming from our existing portfolio. So while we have a number of deals in the pipeline right now, it's a little bit of a mixed bag. We've got some that are existing tenant relationships and some that are, quite frankly, brand new to the portfolio.

Okay. And as part of that deal, you bought a land parcel. Can you just talk a little bit about that and what your thoughts are with that piece of land and what you could build on it and do you have any expectations to build there?

The purchase of the properties was $203 million. There was an underlying land lease on one of the facilities that we negotiated just under $300 million, and we purchased that. So it's already got an existing facility on it. We just wanted to get rid of the land lease.

Got you. Okay.

And then, just going back more generally and thinking about the investment market, talking about an active pipeline, as we're starting to get -- with the reimbursement cuts working themselves through in the market, it's seemingly opening up a little bit more. Just your thoughts on what you're seeing out there in terms of cap rates. Have they moved at all? Where are things trading at today, and how is competition out there right now for what is available?

I think that cap rates are -- even though we've got some ups and downs on the reimbursement, they've still stayed pretty consistent. So I haven't seen any big movements. We haven't really moved off of our return requirements.

As far as just overall competitive nature, there's -- some of the smaller REITs are still doing SNF deals, despite what they might or might not say, and so we're seeing them out there. And then, there is some private money that is doing some deals as well. Those are our primary competitors.

Okay. And then -- appreciate that color. And then, just one final question. The ATM and DRIP activity picked up a little bit this quarter. Is that something you expect to continue? It looked like there was a little more than maybe some previous quarters, so is that something you're just going to opportunistically look at or is that really deal related this quarter?

I think it's really a combination of being a little bit opportunistic and the deals. But frankly at our current leverage levels, we don't need to go aggressively with those programs, so I think future sales are going to be much more deal driven.

Okay. Great. Thanks a lot, guys.

And at this time, I would like to turn the conference back over to Taylor Pickett for any closing remarks.

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

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