Omega Healthcare Investors Inc (OHI) 2013 Q1 法說會逐字稿

Good morning, and welcome to the Omega Healthcare Investors first-quarter 2013 earnings conference call. All 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 fact 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, 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'll now turn the call over to Taylor.

Thanks, Michelle. Good morning, and thank you for joining Omega's first-quarter 2013 earnings conference call.

Adjusted FFO for the first quarter is $0.63 per share, which is a 15% increase over 2012 first-quarter adjusted FFO of $0.55 per share. Normalized funds available for distribution, FAD, for the quarter is $0.57 per share. We increased our quarterly dividend to $0.46 per share. This is a 2.2% increase from last quarter and a 10% increase from the first-quarter 2012. The dividend payout ratio is 73% of adjusted FFO and 81% of FAD. We expect our dividend payout ratio for 2013 to be 75% to 85% of FFO, and generally less than 90% of FAD. We have maintained our 2013 adjusted FFO guidance of $2.45 to $2.50 per share and FAD guidance for 2013 of $2.20 to $2.25 per share.

As Bob will cover later in the call, we sold a significant amount of equity in the latter part of the first quarter and early in the second quarter. The weighted average shares outstanding will increase significantly in the second quarter, which will reduce our quarterly adjusted FFO run rate by approximately $0.02. During the quarter, Moody's upgraded our unsecured debt credit rating to Ba1. S&P and FSH have investment grade ratings on our unsecured debt, while Moody's remains one notch below investment grade. Our operators continue to perform well, and all of our fourth-quarter 2012 acquisitions are fully integrated into our reporting and monitoring management systems.

Bob will now review our first-quarter financial results.

Thank you, Taylor, and good morning.

Our reportable FFO on a diluted basis was $70.1 million or $0.62 per share for the quarter, as compared to $48.2 million or $0.46 per share in the first quarter of 2012. As Taylor mentioned, our adjusted FFO was $71.7 million or $0.63 per share for the quarter, and excludes $1.5 million of non-cash stock-based compensation expense and $134,000 of expenses related to the closing of December 2012 investments. Further information regarding the calculation of FFO is included in our earnings release and also on our website.

Operating revenue for the quarter was $101.8 million, versus $84.5 million for the first quarter of 2012. The increase was primarily a result of $17.1 million of incremental lease revenue from a combination of acquisitions completed in 2012, capital improvements made to our facilities throughout 2012, and lease amendments made during that same time period. The $101.8 million of revenue for the quarter includes approximately $7 million of non-cash revenue. We expect the non-cash revenue component to be approximately $7 million per quarter for 2013.

Operating expense for the first quarter of 2013, when excluding acquisition-related costs and stock-based compensation expense, as well as the 2012 provision for impairment, increased by $4.5 million as compared to the first quarter of 2012. The increase was primarily a result of increased depreciation and amortization expense related to closing of approximately $510 million of new investments in 2012, partially offset by a slight decrease in G&A expense. We project our 2013 annual G&A expense to be approximately $15.5 million, assuming no extraordinary transactions or unusual events.

Interest expense for the quarter, when excluding refinancing cost and non-cash deferred financing costs, was $25.7 million, versus $23 million for the same period in 2012. The $2.7 million increase in interest expense resulted from higher debt balances associated with financings related to the over $500 million of new investments completed in 2012.

Turning to the balance sheet for the quarter. In late March we refinanced approximately $59 million of debt related to 12 mortgage loans guaranteed by the Department of Housing and Urban Development. The 12 HUD mortgage loans had a blended interest rate of 5.55% per annum, with maturities in July of 2044. The refinanced interest rate is approximately 3.06% per annum, with no change in the maturity date on those loans. Subsequent to the quarter end, in April we notified HUD of our intention to pay $51 million to retire 11 mortgage loans. The loans were assumed as part of the 2010 capital source acquisition, and had a blended interest rate of 6.61%. The expected payoff will result in an $11 million non-cash gain on the early extinguishment of fair market value of debt, and will be recorded in the second quarter of 2013.

For the three month period ended March 31, 2013, under our Equity Shelf Programs and our dividend reinvestment and common stock purchase plan, we issued a combined 3.8 million shares of our common stock, generating gross cash proceeds of $107 million. $600,000 of those 3.8 million shares were issued in late March, with settlement dates in April. As a result, we recorded an $18 million other asset on our books in March. $2.4 million of the 3.8 million shares were issued in March, and therefore only partially reflected in our weighted average share count. As Taylor mentioned earlier, the weighted average shares outstanding will reduce our adjusted FFO run rate by approximately $0.02 per share, but still within our guidance.

For the three months ended March 31, 2013, our funded debt to total asset value ratio was 46%, which is well within the maximum 60%. Our funded debt to adjusted annualized EBITDA was 4.5 times, and our adjusted fixed charge coverage ratio was 3.7 times.

I'll now turn the call over to Dan.

Thanks, Bob, and good morning, everyone.

As of March 31, 2013, Omega had a core asset portfolio of 477 facilities, with over 53,000 operating beds, distributed among 46 third-party operators located within 33 states. Operator coverage remained stable during the fourth quarter of 2012. Trailing 12-month operator EBITDARM coverage was 2 times for the period ended December 31, compared to 2 times for the period ended September 30. Trailing 12-month operator EBITDAR coverage for the period ended December 31 was 1.5 times, compared to 1.5 times for the period ended September 30.

On May 1, 2013, CMS proposed certain policy changes for Medicare payments to skilled nursing facilities. The changes included a proposed 1.4% increase to the market basket index. The increase includes the normal 2.3% increase, reduced by a 0.5% forecast error correction, and further reduced by a 0.4% multi-factor productivity adjustment. CMS estimates that the rate increase will result in additional aggregate payments to SNFs of approximately $500 million. We would expect these proposed increases to become final on July 1, and take effect on October 1, 2013.

Turning to our current acquisition pipeline. While no transactions were consummated during the first quarter, we feel confident that our budget acquisition target of $200 million for the year, including CapEx, is very achievable. As usual, however, the timing of such transaction closings is difficult to predict. Subsequent to the first quarter, on May 2, 2013, Omega closed on a $25 million mezz loan to a new operator. The loan bears interest at 12% and matures in December of 2017. The operator is a highly regarded owner of skilled nursing facilities throughout the western United States, and a company that Omega hopes to do future transactions with. As of today, Omega has $500 million available under our revolver for new investments.

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

We will now begin the question-and-answer session.

(Operator instructions)

Jeff Theiler of Green Street Advisors.

Just a couple quick questions here. The 1.4% proposed Medicare rate increase, where would you see coverages trending on that? Is that enough to keep them flat, or do they rise slightly? Or how do you think about the impact of that rate on your coverages?

At that rate, I think we would look at coverages as being flat.

Okay. And then, moving to your capital renovation project. You did the $10 million this quarter. Is there significant room to ramp that up as operators continue to adjust to the new -- the changes in the healthcare system? Do you see that number increasing over the years as we go forward?

We have over $100 million committed to capital projects right now. So, yes, I mean, the first quarter was a little slow just because there was really no method to it, it just was what it was. We expect that to ramp up as the year goes on, actually.

And then going forward, as you look into out years, do you see even potential to ramp that up even more? Or do you think that run rate for the year is a pretty good one to assume?

I think you can probably assume that run rate for the year might be a tad bit conservative. The only thing I would add to Dan's comment is -- we have $100 million committed, and most of these projects have, at the most, a 24-month life cycle. You can kind of think about it that way, and you know, commitments behind that will continue to fill in. But I would say the run rate at $10 million, $12 million a quarter is probably a pretty good estimate.

Okay, great. And then lastly, this mezz loan, can you just talk a little bit more about how that came about, and how you get comfortable with the 12% return versus buying new assets -- whole assets at a 10% return?

I think the main reason behind that loan -- yes, it was a little unique for us. But we did like the operator, and we do feel that there is potential to do more deals with that operator. The company is very solid and has a strong balance sheet, and so we felt comfortable with the 12% versus the normal 10% that we are doing on our sale lease backs. So that was a little bit of the background on that transaction. It is relatively small -- it is $25 million, and we really do think it leads us to potentially do more deals with this company.

So was this -- does it get your foot in the door, so to speak?

It was.

Okay. All right, thanks very much.

Thanks, Jeff.

Tayo Okusanya of Jefferies.

A couple of questions. Apart from everything we have seen on the Medicare end, can you talk a little bit about, at the state level, what you are hearing in regards to Medicaid, and what could happen when states [step] up their budgets July 1?

The general sense is, at the state level -- and our view is that, overall, rates will be fairly flat. There are a number of states where we think there will be some very, very modest increases. I think the bigger dynamic at the state level is -- and we've seen it in Ohio -- is the movement to push dual-eligible -- both Medicaid- and Medicare-eligible recipients into managed care plans. And that's happened in Ohio. And we think that we may see some of that trend across the states where they take the highest and most difficult patients and push them into a managed care environment. But in terms of Medicaid rates, flat to slightly up is where we are.

Okay. And that push more toward managed care, is that -- do you guys see that generally as a net negative for you?

I don't think it is a net negative. I think it is going to be a negative for operators that have small footprints -- the, quote-unquote, mom and pops. For the bigger regional players, I think that will end up being a positive.

Okay, that is helpful. Can we just talk, secondly, just about your largest tenant, Genesis, and they kind of merged with Sun Health at this point. They are talking about a certain amount of synergies that they are hoping to get out of that merger. Just what your overall take is on that particular tenant, and how well they are doing, and opportunities for coverages to rise with that particular tenant, in particular?

Overall, I think the transition has went smooth from their perspective. And from ours, it was obvious they [bid] off the Sun portfolio, which was sizeable, and which was performing well. We don't have a lot of historical numbers under our belt since that acquisition took place, to see how they are doing. But everything that we are hearing has been good. They are recognizing synergies, and we expect them to recognize some more on a go-forward basis.

Okay. And the last question, just guidance-wise. An AFFO of $0.63 this quarter -- you kind of annualize that, you're at $2.52. You're probably still going to get some accretive acquisitions going forward. But really no big change to guidance. Could you just help us reconcile the missing pieces as to why guidance wasn't raised?

Yes, Tayo, as we mentioned in the talking points that we issued a lot of equity, 2.4 million shares, in late March. And as a result, approximately, from an equity standpoint, that's about a $0.02 reduction in the AFFO run rate. And that's just on a run rate based on first quarter. So that puts us in our guidance range.

Right, okay, very helpful. Thank you very much.

Thank you.

(Operator instructions)

Daniel Bernstein of Stifel Nicolaus.

Going back to the mortgage loan that you are doing here in the second quarter -- not a very large loan. But when I look back in your press release for first quarter of last year, mortgage loans were about 9% of your assets. Now they are about 7%. Is there any strategic reason why you would want to get back in, and make the mortgage portfolio a little bit larger relative to the property assets? You're finding better deals on mortgages, or better deals in buying actual properties with lease coverages?

In general, mortgages are accommodations to existing tenants. In this case, we did a mezzanine loan. Again, a loan -- not an accommodation, but an entree. So I would say it is not a focus. We continue to focus on the fee simples. But we will do loans that are opportunistic, either beneficial to our tenants, or an entree to a new relationship, or otherwise opportunistic from a return perspective. But not a core focus.

It will stay under 10%?

Again, I wouldn't rule it out if there were something very opportunistic, but that's the likelihood.

Okay. It just didn't seem like there was a lot of funding out there coming from some of your peers, so maybe there is some opportunity.

But the other question I have is -- when you look at the landscape for consolidation, you have, I think, what has become a little bit more stable reimbursement environment post the 2011 Medicare cut. You've had another two good years of market basket increases. But you also have the coming implementation of the Affordable Care Act. Do you see the industry continuing to consolidate with weaker players where you are getting an opportunity to maybe make some acquisitions and provide capital to some of your better tenants, larger tenants? I guess what I'm asking is -- do you still see consolidation opportunities in the industry, whereas a flattened reimbursement environment kind of knocked that piece down a little bit?

Okay, so the industry is still wildly fragmented, right? I think it's -- we are absolutely going to continue to see consolidation. And as some of these states move to more managed care and bigger controlling payer sources, these smaller operators are going to get hurt. And so there will be an even more need, if you will, to sell out to organizations that have a larger regional presence and a larger footprint. So yes, I do. Long answer for a short question, which is -- I see more consolidation in the industry. It's still very, very fragmented.

Nothing has changed in the thesis, okay.

Yes, and the only thing I would add to that is -- stability in reimbursement is one aspect. But the second is -- and it hasn't stopped -- is the ongoing critical issues within facilities, and the need to continue to ramp up outcomes-based results. And it's just very difficult for a two-, three-, five-facility type business to have the infrastructure to manage that well.

Okay. That's very good. I really don't have any other questions at this time. I'll hop off, thank you.

Thanks, Dan.

Ross Nussbaum of UBS.

Couple questions. First, on the equity issuance pace on the ATM -- do you guys intend to keep up that same level of issuance that you had in the first quarter?

It is going to be driven on deals. At this point, as Dan mentioned, the revolver is fully available. And so the use of equity or the issuance of equity is just going to be (inaudible).

Okay. Can you talk a little bit about where you are seeing cap rates on your deal pipeline going forward? I'm a little curious insofar as we've seen coverage ratios across the industry fall by, call it, what, 20, 30 basis points over the last year? How has that impacted pricing from your standpoint?

It's not the way you think. Obviously, cap rates have gotten more and more aggressive in really the last several quarters. I think the outlook is that coverage ratios will stabilize. Obviously, the coverage ratios have gone down due to the implementation of RUGs IV and then the undoing of RUGs IV. So that was really -- I think everybody predicted that. But with some stability, we have seen cap rates get more aggressive.

So, if you were to put a going-in cash yield number on what you expect to do over the next year, where do you think that number is?

You know, every deal is unique, right? So it's hard to say. I just -- I hate to put numbers out there that people are going to glob on to, right? So I would just say that they have gotten more aggressive than they have been historically.

Okay. On the mezz loan that you guys did in the first quarter, what was the loan-to-value and the interest coverage on that financing?

Off the top of my head -- the loan-to-value was very conservative, it was like 70%.

And I'm sorry, the second question?

The interest coverage.

2 to 1.

Yes, it was high.

Okay.

I don't want --

Last question --.

Yes, about 2 to 1.

Okay, that's fine. Last question for me. On the CapEx front -- not your CapEx, because obviously you have got triple net leases, but your tenants'. From an asset management perspective, do you have a rough sense of how much maintenance renovation CapEx that your tenants have put into the assets over the last year, or how much they plan on putting in over the next year? I'm trying to get a sense of that in relation to the fact that the coverage ratios have been trimmed here, and whether or not they are responding to that with different CapEx plans.

The CapEx spend hasn't changed. It's been fairly consistent, and we've spent some time working through that. The range is $500 to $750 per bed of pure maintenance CapEx. Anything above that is going to be some form of additive CapEx.

And as part of your regular asset management duties, are you regularly having your folks do property visits, looking at the property, calling up the tenants, saying -- look, the roof looks like crap, the parking lot looks like crap, time to fix it. Are those regular conversations that are still happening?

We are out there constantly. And one thing about this industry is that not only are we out there constantly, because it is regulated by the government, you have surveyors out there at least once a year. And part of the survey process is physical plant, and it is -- it's reasonably rigorous. So you have a couple of checks out there. But we see a huge percentage of our portfolio every year.

Appreciate it. Thanks, guys.

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

Thanks, Sue. Thank you for joining the call. Bob Stephenson will be available for follow-up questions.

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