Omega Healthcare Investors Inc (OHI) 2012 Q4 法說會逐字稿

Good morning, and welcome to the Omega Healthcare Fourth-Quarter 2012 Earnings Conference Call. All participants will be in listen-only mode.

(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 production, 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 on the "Financial Information" section of our web site 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 Fourth-Quarter 2012 Earnings Conference Call. Adjusted FFO for the fourth quarter is $0.58 per share. 2012 adjusted FFO is $2.19 per share, a 16% increase over 2011 adjusted FFO of $1.89 per share. Normalized funds available for distribution, FAD, for the quarter is $0.52 per share.

We increased our quarterly common dividend to $0.45 per share. This is a 2.3% increase from last quarter and a 10% increase from the fourth quarter 2011. The dividend payout ratio is 78% of adjusted FFO and 87% of FAD. We expect our dividend payout ratio for 2013 to be 75% to 85% of adjusted FFO, and generally less than 90% of FAD. Our 2013 adjusted FFO guidance is $2.45 to $2.50 per share. We're also providing FAD guidance for 2013 of $2.20 to $2.25 per share. The significant increase from 2012 to 2013 reflects the impact of $510 million of 2012 investments and, to a lesser extent, lease modifications from existing operators. Our 2013 FFO and FAD guidance includes $200 million of new investments.

During the quarter, we closed on a new $700-million unsecured credit facility, which reflects our investment-grade rating in the revised bank covenants and lowers our cost of borrowing. The acquisitions that we closed on in 2012 further diversify both our operator base and our state-by-state exposure. For 2013, we only have one operator, Genesis, at 13%. That accounts for more than 10% of our contractual rent. We now have 10 or more facilities in 17 key states. Bob will now review our fourth-quarter financial results.

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $61.4 million, $0.55 per share for the quarter, as compared to $46.3 million or $0.45 per share for the fourth quarter 2011. Our adjusted FFO was $64.9 million, or $0.58 per share for the quarter, and excludes $2.5 million of interest rate financing expense, $1.5 million of non-cash stock-based compensation expense, $772,000 of one-time revenue, and $223,000 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 $95 million versus $76.3 million for the fourth quarter 2011. The increase was primarily a result of $15.1 million of incremental lease revenue from a combination of acquisitions completed in late 2011 and throughout 2012, capital improvements made to our facilities throughout 2012, and lease amendments made during that same time period, $2.3 million of incremental mortgage interest from new mortgages originated in late 2011 and throughout 2012, and $800,000 of other investment income related to a note originated in December 2011. The $95 million of revenue for the quarter includes approximately $7.3 million of non-cash revenue. We expect that non-cash revenue component to be approximately $7.5 million per quarter for 2013.

Operating expense for the fourth quarter of 2012, when excluding acquisition-related costs and stock-based compensation expense as well as the 2011 provision for impairments and uncollectible accounts receivable, increased by $5.6 million as compared to the fourth quarter of 2011. The increase was primarily a result of $4.8 million in depreciation and amortization expense related to the closing of approximately $510 million of new investments in 2012. From a G&A standpoint, we project our 2013 G&A expense to be in line with our 2012 G&A or approximately $15.5 million, assuming no extraordinary transactions or unusual cost or events. Interest expense for the quarter, when excluding refinancing cost and non-cash deferred financing cost, was $24.5 million versus $21 million for the same period in 2011. The $3.5-million increase in interest expense resulted from higher debt balances associated with financings related to new investments completed throughout 2012.

We had a number of 2012 transactions that impacted our balance sheet. Some of the significant items were as follows. During the fourth quarter, we've completed $250 million of new investments. Dan will go through these new investments shortly. These new investments were financed primarily by borrowings under our new $700-million unsecured credit facility entered into in December 2012 and the assumption of $72 million of HUD loans. The $700-million unsecured credit facility is made up of a $500-million four-year revolver and a $200-million five-year term loan. Both are priced at LIBOR plus an applicable percentage based on the Company's ratings from two of the three rating agencies. As a result of entering into the new 2012 credit facility and terminating our old credit facility, during the fourth quarter of 2012, we recorded a non-cash charge of approximately $2.5 million related to the write-off of deferred financing costs associated with the 2011 credit facility. The $72 million of HUD loans were assumed as part of consideration for our fourth-quarter new investments and is comprised of eight HUD mortgage loans with a blended interest rate of 5.5% and maturities between April 2031 and February 2045.

In March, we issued and sold $400 million 8.75% senior unsecured notes due 2024. Proceeds from this offering were used to tender and redeem our $175 million 7% bonds due 2016 and pay out standing balances under our credit facility. In the fourth quarter, we sold two facilities for total cash proceeds of $4.8 million and recorded a $2.8-million accounting gain. Throughout 2012, we sold nine facilities for total cash proceeds of $29 million and recorded $12 million in accounting gains. For the twelve-month period ended December 31, 2012, under our equity shelf program and our dividend reinvestment common stock purchase plan, we issued a combined 8.5 million shares of our common stock generating net cash proceeds of $192 million or an average price of $22.66 per share. For the three months ended December 31, 2012, our funded debt to total asset value ratio was 49%, which is well within the maximum of 60%. Our funded debt to adjusted annualized EBITDA was 4.7 times, and our adjusted fixed charge coverage ratio was 3.8 times. I will now turn the call over to Dan.

Thanks Bob, and good morning, everyone. As of December 31, 2012, Omega had a core asset portfolio of 476 facilities with over 53,000 operating beds distributed among 46 third-party operators located within 33 states. Operator coverage remains relatively stable during the third quarter of 2012. Trailing 12-month operator EBITDARM coverage was 2 times for the period ended September 30 compared to 2 times for the period ended June 30, 2012. Trailing 12-month operating EBITDAR coverage for the period ended September 30 was 1.5 times compared to 1.6 times for the period ended June 30, 2012. The trailing 12-month results through September no longer contain any quarter which was positively affected by RUGS IV.

Turning to new acquisitions. During the fourth quarter of 2012, Omega completed five separate acquisitions with three different operators totaling $237 million. Acquisitions involved 17 SNFs with 2,050 beds and two ALFs with 268 units. The weighted average cash yield on these acquisitions was just over 10%. And addition, during the fourth quarter, the Company made capital expenditures totaling $13 million. For the year ended December 31, 2012, Omega completed new investments of $510 million. The investments involved a total of nine separate transactions with five different operators totaling $468 million. In addition, Omega invested over $42 million in capital expenditures, including investments in the construction of several new facilities. The average cash yield on the investments was just under 10.5% with annual escalators of 2.5%. The new investments involved 52 separate facilities, of which 40 were SNFs and 12 were either ALFs or ILFs, for a total of nearly 5,800 beds and/or units.

Turning to portfolio developments. On December 1, 2012, Genesis Healthcare, an existing operator of the Company, completed the purchase of Sun Healthcare Group, also an existing operator of the Company. In connection with the acquisition on December 1, the Company entered into a new 53-facility master lease with Genesis expiring on December 31, 2025. At December 31, 2012, Genesis was the Company's largest tenant with $357 million in leased assets located in 13 states. Currently, Omega is actively reviewing a number of potential transactions. As of today, the Company has $475 million on our revolver available for new investments.

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

(Operator Instructions)

And our first question is from James Milam of Sandler O'Neill.

First question, you said the yield on the acquisitions was just over 10%. Can you give us the contractual rent increases for the acquisitions? And then, also on the Genesis lease, I'm assuming it's around 2.5%, but just want to confirm that with you guys.

It's 2.5% across-the-board for both new acquisitions and the Genesis lease.

Perfect. Thanks. And then, you said there's $475 million available on the revolver. Should I take that to mean that you drew the additional $100 million on the term loan down sometime last month or so?

That is correct. We did then in January.

Great. Thanks. And then my last one, just, you guys have outlined $200 million of acquisitions in your guidance. What should we assume for funding those deals? Maybe you could make some comments on the DRIP and the ATM, which looked like you used less of those in the fourth quarter, and then if we should just expect line-of-credit funding to match your guidance assumptions?

Yes, I think from a modeling perspective, I would just use the line of credit for what we are assuming. Right now, given where our leverage sits, we are really comfortable.

Okay. Perfect. Thanks guys.

And the next question is from Jeff Theiler of Green Street Advisors.

Hi, good morning. Just a quick question on your acquisitions. Can you talk a little bit about why you had such high volume this quarter but your guidance is only for $200 million going forward? Did you pull some acquisitions in this quarter that you thought may have closed in 2013? Or can you just help me figure out the discrepancy there?

It really is just the nature of the pipeline, Jeff. The deals that closed towards the end of this year have been floating around for quite a while during the year and took a long time to close. And although the pipeline's fairly active today, as Dan mentioned, there's nothing imminent. And so, you might think about $200 million as relatively conservative given the last couple of years, but based on what we're seeing today, we have nothing in the first quarter. There may be some stuff in the second quarter. It's just hard to predict.

Okay. And then what kind of coverages are you underwriting right now for your acquisitions? We've had this cut that's now worked its way through. We got the market basket increase in October. Are you starting to reduce your initial coverages? I think last time we talked, you were at 1.5 times as a starting coverage on acquisitions.

Yes. We're really -- it's been consistent over the last 12 to 18 months at 1.4 coverage, is what we currently underwrite to. And that's not going to change.

Okay, 1.4 coverage?

But 1.4 taking into account all of the --

Known cuts.

-- known cuts.

Right. Right. And then lastly, just on the cap rates. We've seen cap rates in every other sector compress. At least the products that you are buying are not. Why do you think that is? Is that just that there's higher risk because of Medicare and Medicaid going forward? Is it just that there's not enough buyers in the market chasing that kind of product in order to see the cap rate compression that we would think? Do you have an explanation for why those cap rates, you are able to acquire such attractively of priced assets?

I think it's perceived risk, from our perspective. We feel comfortable we can underwrite that risk in the way we look at our assets, but there's certainly perceived risk out in the market. And there are probably fewer dollars chasing assets today than there were two years ago.

Okay. Great. Thanks very much.

And the next question is from Henry Reukauf of Deutsche Bank.

Hi, guys. Sounds like you're pretty good shape with your revolver availability given the expectations for acquisitions. But once you are through those, with $200 million of acquisitions, I assume that -- done. I assume you'll probably want to re-up. Do think the next move here in terms of a permanent -- permanent capital financing, I think it's either bond, or do you think it would be equity, just in terms of balancing out leverage?

We've typically issued about 50% equity over time, albeit not exactly timed with acquisitions. So I think from a modeling perspective, you can think about 50% equity, and given if it were today, given where the bond market is today, bonds would be a good answer for us.

Okay. And have you -- I know you still have the BAA rating on Moody's. Have you been out to talk with them recently about any potential upgrade?

We had our January call with them, and typically, we wait till after our year-end earnings, and then we meet with all the rating agencies face-to-face. We'll be meeting with them shortly.

Okay. So, no real update there. Thanks very much.

And the next question is from Tayo Okusanya of Jefferies.

Yes, good morning. Congrats on a great quarter. Quick question. In regards to the guidance, the non-cash revenue that makes up the big difference between the AFFO and the FAD number. Could you explain what that is, that $0.26?

It's basically all straight line, Tayo. And if you look at the run rate of that in Q4, Bob had mentioned it was $7.3 million. It moves up slightly to $7.5 million as a run rate in 2013. So it's really not (inaudible).

And that's all based on just the recent amount of acquisitions that were done?

Yes. Well, the acquisitions, obviously, increase the number, and then the natural rent step ups that we have embedded in our leases decreases. There's some offset in there.

Got it. And then, I guess the question is, why now show that as a separate line item to get you to FAD? Why doesn't that roll up to your AFFO number? I was -- that used to that part of your AFFO number the past.

No. No. Our adjusted FFO always had straight line in it. And different folks have come out and said here's what we think the FAD is, and we decided that it made sense, since it's a not small difference, to just lay it out from our perspective in both guidance and in our press releases going forward.

But going forward, we will be getting these three numbers, an FFO number, an AFFO number, and an FAD number?

That's correct.

Okay. That's helpful. So, that's the first thing. And then the second thing is, with the coverage ratios where they are right now, we've not had a year to work through the 11% Medicare cut from October of last year. When you talk to clients now, as you start to see more current operating results, are you actually starting to see the coverage ratios starting to improve? Or -- and was this the quarter where they seem to have troughed, or are there still some issues going forward that could still put pressure on the coverage ratios?

No. I think from a trailing 12-month perspective, that they really have troughed. We've had the last quarter of the RUGS IV numbers burn off. So I think quarter-over-quarter they've been very stable, and I think that's what we expect going forward.

Yes, and just to add a little bit to that. I wouldn't expect coverage ratios to improve. I think the reality in our industry today is stability is a win. And that doesn't take into account the potential for a modest sequestration cut or other things.

You are saying they may not improve because of some of the upcoming headwinds, like sequestration. Is that what you're saying?

Well, I think stability is really what we're looking at, that if there are improvements, they're going to be very, very modest. And frankly, you think about the pressures from both the Medicaid and Medicare perspective, our view is stable coverage ratios is a good answer in today's environment.

Okay. That's helpful. And just going to sequestration, if you were a betting man, would you say it's going happen, or do you think we'll ultimately end up with a totally different plan?

I guess it depends on the bet, Tayo. It's sure seems like we are going to see sequestration, and then maybe a response to that. Obviously, the 2%, we've done that math. We've talked about it. It's about 0.05 to 0.06 in terms of coverage, so really not dramatic in terms of our cushions. But it sure seems like that's step one and then we go from there.

Okay. Any particular worries about Genesis with, again, the latest round of cuts to therapy services as part of the Tax Relief Act that just passed on January 1? Are you going to see more pressure on that rent coverage versus the rest of your portfolio?

Perhaps a little bit, but I don't think it will be significant. The rent coverages on that portfolio are strong. Sun's rent coverages were particularly strong, and that, obviously, is all rolled together. Although there's a big focus on therapy in that portfolio, our view is that it -- again, it will be fairly marginal.

Okay. Could you tell us what the coverage is specifically on Genesis?

We don't give out specific coverages on specific operators, particularly -- well, in this case, they're private.

Okay. That's helpful. And then what's the latest with CommuniCare and all of the initiatives they have in place to stabilize their rent coverage rations?

I think CommuniCare and some of our other top 10, they have managed to stave off some expenses. And they're undertaking, like a lot of our large and medium size and smaller operators, a number of capital expenditure programs to really just improve upon their portfolio and their assets, and they're ongoing right now. I think CommuniCare, for instance, has close to 100 beds out of service, so they're doing quite a bit of CapEx on their portfolio.

Okay. So for CommuniCare, have 11.1% cut. Could you give us a sense of what's happened with their coverage ratio? Have they now finally stabilized, have they improved, or where are we?

Yes. Once again, they're a private company, so we're not going to give out specific coverages.

Right. Just want to get a sense of trend.

They're still north of 125. And they've been pretty stable. They've got to get through a number of these CapEx programs that they're undertaking right now because it does take so many beds out of service as they are undergoing them, and that hits individual facilities. So, we feel good about where they are and where they're going.

That's helpful. Thank you.

And our next question is from John Roberts of Hilliard Lyons.

Hi, good morning. Most of my questions have been asked. And one of them danced around, which is the $200 million in expected acquisitions this year. Kind of low versus last year, and you say that 's conservative. Is that because it's basically what you've got visibility for in the pipeline right now, and then anything later in the year would be above and beyond that?

Actually, we really don't have any visibility in the pipeline other than the pipeline's active. We have nothing that's gotten to letter-of-intent stage. We are looking at doing third-party diligence, and we think it gets to the finish line. So really, the $200 million is just consistent with the past where we -- there's a lot floating around. It's going to be lumpy again. And as I mentioned earlier, anything that gets done is going to be more, again, probably back ended.

So, what, back end of the year?

There's nothing in the first quarter that we see of any consequence. So for sure, it's pushing into second and probably beyond.

Okay. And dividend. Given the increase in guidance for 2013 versus what the street was expecting and the history of quarterly dividend increases, you anticipate similar going forward?

As a board, we look every quarter. And I had mentioned in our guidance that our expectation would be a payout ratio of 75% to 85% of adjusted FFO and something less than 90% of FAD. You can look at that math, if we hold to that guidance, John, I would expect you'd see dividend increases as we move through the year.

Great. Thanks guys.

And next we have a question from Jason Ren of Dawson Phelps Investment Management.

Hi. Thank you for taking my question. Of the acquisitions you completed in 2012, what percentage of them have an operator or tenant purchase or buyout option at the end of the contract? And how does that compare to your overall portfolio? I'm just trying to get to a sense of what's subject to a buyout and what's not.

None of the deals that we did in 2012 have a buyback option.

Okay. What about your overall portfolio if you were to think about percentages?

It's less than 10%. It might be less than 5%. I don't know that number off the top of my head.

It's very modest, and it's in way-out years. For the most part, 2020 and beyond.

Okay. And so I would assume that since the percentage might be so modest that there is little effect if you were to exclude any premium associated with the buyout option?

Little effect, that's correct.

Okay. Great. Thank you.

And the next question is from Rob Mains of Stifel Nicholas.

Yes, good morning. Following up on the question about how the pipeline is looking for this year. Would it be fair to say, given what happened in the fourth quarter, that you might have pulled some deals forward from the beginning of the year to capital gains tax related or anything like that?

Well, there were certainly deals that it took a while to close this year that folks were very anxious to get closed in the fourth quarter versus the first quarter because we were at a position, having done all the work, to make that happen. But I don't know that I would say that they were pulled forward from a planning perspective. Dan, most of those were in the pipeline for quite a while, right?

Yes, they have been.

Right. I guess a better way to ask would be were they deals that might have otherwise closed in the first quarter that got scrambled to make the December 31 deadline?

Sure. Everybody wanted to close by year-end. There's no doubt about that.

Okay.

If we would have had our druthers, yes, we would have spread it out a little bit, but that --

Got it. So that might be why we're seeing this lull at the beginning of the year?

I think it's a natural lull. I think we see it all most every year, to be honest. You know, there's a big push at the end of the year to get stuff closed, and then there's a little bit of a lull. We seen that at least the last two years.

Okay. And then the Genesis and Sun leases, is there any change in the base lease rate that you're going to collect from the -- well, them, I guess it's one now.

There were some modest changes, but again, we have a confidentiality agreement with them, and it's baked in all of our numbers. And I don't mean to be evasive, but, we got -- we extended the lease. Our escalators are 2.5% flat, which is a little bit of a change. We improved the credit, and we have a little bit of incremental rent, and it's all baked into the numbers that you see.

Okay. And then I don't know if you can answer this or not. But could you remind us, were those two leases, were those 2.5% flat escalators previously?

No. They were separate deals because of the way Sun came together. If you remember, they bought Harborside; they bought Peak. Genesis was a separate negotiation, so we had, essentially, four different deal that we combined into one, and so the escalators were all different. And they were a little bit less, frankly. So we got a little bit of improvement there.

Okay. That was my question. Thank you.

(Operator Instructions)

And showing no further questions, I would like to turn the conference back over to Taylor Pickett for any closing remarks.

Thank you for joining this morning's call. Bob will be available for any follow-up questions.

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