Omega Healthcare Investors Inc (OHI) 2013 Q2 法說會逐字稿

Good morning and welcome to the Omega HealthCare Investors second quarter earnings call for 2013. I would now like to turn the conference over to Michelle Reber. 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 maybe forward-looking statements, such as statements regarding our financial and FFO projections, dividend policy, portfolio restructuring, rent payments, financial conditions or prospects of our operators, contemplated acquisitions and our business and portfolio outlook generally. These forward-looking statements involverisks 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, reconciliations these non-G AAP 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 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 thank you for joining Omega's second quarter 2013 earnings conference call. Adjusted FFO for the second quarter is $0.62 per share which is a 17% increase over 2012 second quarter adjusted FFO of $0.53 per share. Normalized funds available for distribution FAD for the quarter is $0.56 per share. We increased our quarterly common dividend to $0.47 per share. This is a 2.2 %increase from the last quarter and a 12% increase from the second quarter 2012. We have now increased the dividend four consecutive quarters and 57% over the past 4 years.

The dividend pay out ratio is 76% of adjusted FFO and 84% 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. We've increased our 2013 adjusted FFO guidance to a range of $2.48 to $2.51 per share and 2013 FAD guidance to a range of $2.23 per share to $2.26 per share. As we discussed last quarter 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 increased from $113.5 million shares the in first quarter to $117 million shares in the second quarter which is the reason our quarterly adjusted FFO run rate went down by a $0.01.

I will now turn the call over to Bob to review second quarter financial results.

Thank you, Taylor and good morning. Our reported FFO on a diluted basis was $82.4 million or $0.70 pershare for the quarter compared to $55.8 million or $0.53 per quarter in the second quarter 2012. As Taylor mentioned our adjusted FFO was $72 .9 million or $0.62 per share for the quarter and excludes an $11.1 million gain related to the early extinguishment of debt and $1.5 million of non-cash stock based compensation expenses. Further information regarding the calculation of FFO is included in our earnings release and on our website. Operating revenue for the quarter was $102.5 million versus $83.5 million for the second quarter of 2012.

The increase was primarily a result of incremental lease revenue from a combination of acquisitions completed since June 2012, capital improvements made to our facilities, and lease amendments made during that time period. The $102.5 million in revenue for the quarter includes approximately $7.8 million of noncash revenue. We expect the noncash revenue components to be between $7 million and $8 million per quarter for the remainder of 2013.

Operating expense for the second quarter 2013 when excluding acquisition related cost, stock based compensation expense and provision for (inaudible) increased by $5.5 million as compared to the second quarter 2012. The increase was primarily a result of increased depreciation and amortization expense related to the closing of approximately $510 million of new investments since June 2012 and a slight increase in our G&A expense. We project our 2013 annual G&A expense be approximately $15.5 million. Interest expense for the quarter when excluding refinancing cost and noncash deferred financing cost was $24.9 million versus $24 million for the same period in 2012.

The $900,000 increase in interest expense resulted from higher debt balances associated with financings related to the $510 million of new investments completed since June 2012. Turning to the balance sheet, on May 31, 2013 we paid $51 million to retire 11 mortgage loans guaranteed by the Department of Housing and Urban Development. The loans were assumed as a part of a 2010 capital source acquisition and had a blended interest rate of 6.61%. The payoff resulted in a an $11 million net gain on the early extinguishing of fair market value debt and is classified as interest free financing cost on our income statement. During the second quarter we sold one Texas facility for total cash proceeds of $2.2 million which resulted in a loss on sale of $1.2 million.

In connection with the sale of this facility we wrote off approximately $65 thousand of noncash straight line receivables. In late March we refinanced approximately $59 million of debt related to 12 mortgage loans guaranteed by HUD The 12 HUD mortgage loans had a blended interest rate of 5.55% with maturities in July of 2044. The refinanced interest rate is approximately 3.06% and did not change the maturity date on those loans. For the 6 month period ended in June 30, 2013under our equity shelf program and dividend reinvestment in common stock purchase plan, we issued our combination of 4.7 million shares of common stock generating gross cash proceeds of approximately $142 million.

For the 3 months ending June 30, 2013 our funded debt to total assets value ratio was 44%, well within the maximum of 60%. Our funded debt to adjusted annualized EBITDA was 4.3 times and our adjusted fixed charge cover ratio was 3.8 times. I will now turn the call the call over to Dan.

Thanks. As of June 30, 2013, Omega had a core asset portfolio of 477 facilities with approximately 53,000 operating beds distributed among 47 third-party operators and located within 33 states. Operator coverage remains stable during the first quarter of 2013. Trailing 12 month operator EBIT DARN coverage was 2 times for the period ending March 31, 2013 compared to 2 times for the period ending December 31, 2012.

Trailing 12 month operator EBITDAR coverage for the period ending March 31, 2013 was 1.5 times compared to 1.5 times the period of ending December 31. This marks the third consecutive quarter where our trailing EBIT DARN and EBITDAR has remain stable at 2 times and 1.5 times, respectively. Turning to our current acquisition pipeline. As previously disclosed on May 2nd, 2013, Omega closed on a $25 million mezzanine loan to a new operator.

Year-to-date new investments including capital expenditures totaled $45 million. Our budgeted acquisition target remains at $200 million for the year, including CapEx. Similar to last 2 years the majority of these investments are expected to take place in the later portion of the year, very likely the fourth quarter. As usual however the timing of such transition closings is difficult to predict. As of today Omega has $500 million available under our revolving line of credit for new investments.

Thanks Dan. We will now open the call up for questions. The first question is from Caitlin Burrows from Goldman Sachs.

Good morning. Just on the it topic of acquisitions could you describe the (inaudible ) acquisition opportunities you are seeing in the market and whether there are any large portfolios?

Sure. I would say the opportunities are consistent with what we have been seeing for the last 6 months to 9 months. So our typical 1 to 5 facility type deals that are floating around and then there are a couple of larger transactions out in the marketplace that could be interesting. The environment itself had gotten a little bit aggressive in terms of pricing and cap rates we are seeing a little bit of easing there where we are getting back into our underwriting world pushing back towards 10 percent yields. I think it is just driven from the rate environment getting a little tougher.

Right. In terms of the larger portfolio and the other companies that might be interested in them do you think which has the cash to capital to purchase them?

It really is not cost of capital as it is the pricing and what sort of the yields are attractive. Cap rates to push down in the low 8s generally don't make sense for us.

I see. Okay, great. Thanks.

Next question comes from Dan Bernstein from (inaudible)

Good morning gentlemen. Onthe pipeline side, where was the competition coming from, was it private equity, was it private REIT, were there certain differences in the quality of portfolios that are out there now versus say a couple of months ago pre (inaudible ) comments.

I don't think the quality of portfolio out there has changed any. I think we are seeing competition from the private REIT though not so much from the private equity groups. There obviously is some new entry's into the market place with the (inaudible) idea.

Okay. (inaudible). I look at your balance sheet and you don't have many debt maturities out there but obviously (inaudible) you refinance them through higher cost debt. Is there anything else out there you can prepay early now that you might take advantage of?

I think the balance sheet is pretty much set. The HUD debt we paid off was a little bit higher rate and we had to choose between potentially refinancing with HUD at a lower rate or pay it off. We chose to pay it off because it was relatively low on a value type assets so we decided to (inaudible). There is a little bit of tweaking in the HUD debt and potential for refinancing but those window take a fairly long time. Other than that we don't have anything.

Has HUD changed any of the financing criteria since May? I mean how much have rates gone up if you wanted to HUD again or if any of your operators were looking at HUD.

It's bounced around a little bit but I'd say from the low, there were rates put out there from below 3%, and now I think the rates are being quoted at 4% to 4.25% and there abouts and they have gone up.

Basically they move with the interest rates on the tenure.

That is correct.

The other question I had involved lease coverages. Your lease coverage has been steady. When you saw a couple of other REITs out there had their skilled nursing (inaudible ) maybe deteriorate in the quarter. Is there anything going out there other than the sequestration that may be impacting SNIFF operations?

There was the 2% cut in April which had some impact particularly on the Medicare side there is only so much more to cut so the folks that all large and sophisticated don't really cut what they're going to cut. So the 2% percent certainly hit I don't see much in the way of future ding's at this time. The is not a lot of catalyst to get these coverages up significantly at least in the coming quarters. I would say at least from our perspective stability is the name of the game.

Sounds good to me. I will hop off.

Your next question comes from John Perry with Deutsche Bank. (Inaudible)

Following-up on a couple of other questions. We heard from some of the other company's some of other REITs that sellers have not adjusted to the new interest rate environment yet. You went over that a bit, but are you saying that most of the sellers have potentially understood that cap rates have got to go up to be more reasonable in their pricing at this point?

We are starting to see -- for the first part of this year we saw prices just driving down, And it feels like its moving back the other way. Just less demand where folks are thinking that cap rates should be in the 8's in term of cash yields on these type of deals obviously that doesn't work. My sense is that it is moving the other direction. Now people who have been in the market for six months and (Inaudible) and they missed.

Okay. And $200 million in acquisition given the amount you have done so far in the year sounds aggressive do you have something specific in the pipeline that you are going to be able to do that?

There is enough in the pipeline with various sizes of deals where we think we feel pretty good about if 1 or more of those comes across the finish line but again it is going to be towards the back end of the year any meaningful way this years FFO.

Okay. And the pricing on those you feel is good enough to get them across the finish line.

We are hopeful.

Okay. Thanks guys.

The next question from Tayo Okusanya of Jefferies.

Good morning guys this is David Shamus on the line. Just wondering if we could drill down a little bit on the $200 million target. How much of that is actual acquisition versus capital improvements?

We typical run about $10 million a quarter in CapEx spend and our expectation that will be pretty consistent for the foreseeable future. The balance is money out for acquisition.

Okay. Can you talk a little bit about your acquisition pipeline have you seen any slow down or change in the pace of deals you are seeing out there?

No. I think we have seen cap rates bump around but the consistency of deal flow has not change dramatically. We see a little bit of everything. The small deal that are coming from our existing operator portfolio. Touching some of the bigger deals that are out there.

Great. Last one, with your stock pulling back over the last couple of months does that change the way you think of using the ATM to fund new investments?

No. From our perspective we are going to look at this point in time, we have the full line available. We haven't closed any deals. We are not going to do capital raising in advance of deals look at the market as we close deals and decide how to take it out. At the existing share price we are still comfortable in issuing equity.

That is very helpful. Thank you very much.

The next question is from Nick (Inaudible).

Thanks. Go back to this commentary about how pricing is change for acquisition how it got aggressive in the spring and now maybe your sense is cap rates are returning to more usual levels. How much of the activity in the spring was driven by people looking at where you're stock was trading where your (inaudible) was and essentially pushing you guys to say you can by cap rate be accretive to your earns.

Because what I'm wondering any other likely buyers out there that people thought of if assets really got priced to a 8 cap rate for Skilled Nursing were there any other buyer out there who envisioned by sellers and bankers other than you guys and a couple of other firms.

Some of the private REIT money has been pushing money around a little bit. Also the HUD debt dipping down to 3 and below 3 that create add lot of the frenzy in the cap rate not so much for sellers but for folks looking for capital.

Okay. Just going back to how you think about acquisitions at this point. Would you at all be willing to look at companies where you would have to let's say take on some operator where there would be a sale of entities where there would be an operator component and you would have to find something to -- essentially find a new operator and just take the real estate itself?

Sure. In many of our transactions we have done over time different third-party operator and we partnered with our existing portfolio of operators to buy the assets and lease them to our operators, so those types of transactions are typical for us. And I understand your question think about some of these bigger deals with the number of operators we have across our geography we are uniquely positioned for that type of transaction.

Just lastly one last question if you look at cap rates overtime they tend to be in the 10% to 11% range regardless where 10 year treasury yield has been seems like you have to go back 10 years. Is there an expectation that cap rates still do stay in that range even if interest rates are going up that historically the cap rates should stay within that range you think?

Over our careers which is 2 decades plus 9 to 11 has been the band and every once in while you get outside of that. I don't see any catalyst or cap rates going outside that band. That is the short answer.

Okay. All right. Nick: Thanks guys.

The next question is from (Inaudible).

Hey Taylor we are tag teaming you from UBS. (Inaudible)I want to follow-up on my colleagues question because the answer you just gave to that question seems god awful frightening to meIf cap rates are going to remain in that range and we are about to enter what maybe a multiple year period of raising interest rates , it would result in compressing yield spreads for Omega versus your cost of capital which may or may not have valuation implications. How do you think about that from a strategic point view from a growth business model perspective?

I will role back a little bit in our history for a very, very long time, we did deals with 3% spreads relative to cost of debt and 10% yield and 7% yield on bonds. Today if we did a bond deal it would be 5.25% , 5.50% typepaper. So obviously the yield spreads are larger today than they have been historically. I don't think our model has changed , I mean to the extent that we have a 10% cap rate yields and we're still issuing debt at 5.25%, 5.50% that's great

If the debt markets move 100 bits that's still fine. The model still works and because you have built in escalators and growth and there is plenty of spread there for the opportunity grow the business. We are talking about an environment where suddenly debt 10 year yields are 9 than the model changes. but we haven't faced that yet. And frankly when you think about this business in sales lease backs in this industry we haven't faced it as an industry in terms of cap rates that I have ever been involved in. At that point maybe cap rates do move.

Appreciate it that is helpful. Thanks.

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

Good morning guys. Just a quick one on coverages. Certainly looking at the aggregate coverage it looks fine I just want to drill in a little bit see if there is any material leases that might be significantly below that aggregate number say 1, 2 times EBITDAR something like that?

Most of our particularly in the top 10 they run in a fairly narrow band I would say between 130 and 170, 180. There is 1 operator in that top 10 that runs slightly below that but still above 1 to 1 and there are some stories in that particular credit that gives us the comfort it is not problem situation. Overall our coverage for our big operators run on a pretty tight vein. nobody really outside that. The 1 that runs below closer to 1 what percent of the NOI what is the magnitude of that? About 4%.

4%.

Okay.

Have you ever given any thought that HCP put out a new disclosure item where they listed out each 1 of their material master leases and where it ranges in relation to the overall aggregate number. Have you given any thought to enhancing your disclosure like that.

I'm trying to remember the disclosure did they actually identify the operators by master lease?

No, I guess that was an issue to identify the operators. It was more they have a bunch of different type of properties but here is a Skilled Nursing lease that accounts for 2% of our triple net NOI and here is another 1 at 4% coverage that type of disclosure.

That was a slide on a grid.

Yes, exactly. Heat map they called it.

I saw it. I thought it was pretty interesting. The 1 issue that we would have to think about private operators can you be sure in that type of scenario we are not disclosing who they are. Something we thought about. At one point we laid out the percentage in different categories maybe we'll do something like that where X is above this and Y is 1.5 to 1.75 and Z is 1.25. The issue you run into of course, is you having a lot of discussion about below 1.25 which is not a meaningful percentage typical there is some credit discussion around it. But I understand the point I think their heat map is interesting.

Okay.

Great.

Thanks very much.

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

Thank you. Bob Stephenson will be available for follow-up questions.

Your conference has now concluded. Thank you for attending today's presentation.