Omega Healthcare Investors Inc (OHI) 2013 Q3 法說會逐字稿

Good morning and welcome to the Omega Healthcare Investors Inc third-quarter 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.

Thanks 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. 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 2013 earnings conference call. Adjusted FFO for the third quarter is $0.63 per share which is a 17% increase over 2012 third-quarter adjusted FFO of $0.54 per share. Normalized funds available for distribution, FAD, for the quarter is $0.57 per share.

We increased our quarterly common dividend to $0.48 per share. This is at 2.2% increase from the last quarter and a 12% increase from the third quarter 2012. We've now increased the dividend five consecutive quarters. The dividend payout ratio is 76% of adjusted FFO and 84% of FAD. We expect our dividend payout ratio for 2013 to be between 75% and 85% of adjusted FFO and less than 85% of FAD.

We have maintained our 2013 adjusted FFO guidance range of $2.48 to $2.51 per share. And 2013 FAD guidance range of $2.23 to $2.26 per share. In September we announced that we committed to enter into a $525 million, 56 facility sale-lease back transaction in connection with the proposed acquisition of Ark Holding Company. At this time, the regulatory and third-party reporting remains on pace for a December closing.

Bob will now review our third-quarter financial results.

Thank you Taylor, and good morning.

Our reportable FFO on a diluted basis was $70.3 million or $0.59 per share for the quarter, as compared to $56.7 million or $0.52 per share in the third quarter of 2012. As Taylor mentioned, our adjusted FFO was $74.2 million or $0.63 per share for the quarter and excludes a $2.3 million provision for uncollectible straight-line accounts receivable and $1.5 million of non-cash stock-based compensation expense. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter was $103.3 million versus $87.1 million for the third quarter of 2012. The increase was primarily a result of incremental lease revenue from a combination of acquisitions completed since July 2012, capital improvements made to our facilities and lease amendments made during that same time period. The $103.3 million of revenue for the quarter includes approximately $7.6 million of non cash revenue. We expect the non cash revenue component to remain between $7 million and $8 million for the fourth quarter of 2013.

Operating expense for the third quarter of 2013, when excluding acquisition related costs, stock-based compensation expense, and the provision for uncollectible accounts receivable, increased by $4.2 million as compared to the third quarter of 2012. The increase was primarily a result of increased depreciation and amortization expense related to the closing of approximately $515 million of new investments since July of 2012 and a slight increase in our G&A expense. We project our 2013 fourth-quarter G&A expense to be in line with our third quarter, assuming no extraordinary transactions or unusual events.

As outlined in our press release yesterday, during the third quarter, we recorded a $2.3 million provision for uncollectible straight-line accounts receivable, resulting from the transition of 11 Arkansas facilities from Advocate to a new third-party operator. Interest expense for the quarter, when excluding non-cash deferred financing costs, was $24.5 million versus $24.1 million for the same period in 2012. The $400,000 increase in interest expense resulted from higher debt balances associated with financings related to the $515 million of new investments completed since July of 2012.

Turning to the balance sheet for the year, in March we refinanced approximately $59 million in 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 2044. The refinanced interest rate is approximately 3.06% per annum and did not change the loan maturity dates. In May we paid $51 million to retire 11 mortgage loans guaranteed by HUD. The loans were assumed as part of the 2010 Capital Source acquisition and had a blended interest rate of 6.61%. The payoff resulted in an $11 million net gain for the extinguishment of the fair market value of debt and is classified as interest rate financing costs on our income statement.

For the nine-month period ended September 30, 2013, under our equity shelf program and our dividend reinvestment and common stock purchase plan, we issued a combined 7.1 million shares of our common stock, generating gross proceeds of $212 million. Subsequent to the end of the third quarter, on October 5 in an underwritten public offering, we issued 2.875 million shares of common stock generating net cash proceeds of $85 million. For the three months ended September 30, 2013, our funded debt to total asset value ratio was 43% and our funded debt to adjusted annualized EBITDA was 4.4 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 September 30, 2013, Omega had a core asset portfolio of 477 facilities with approximately 53,000 operating beds distributed among 48 third-party operators located within 33 states. Trailing 12 month operator EBITDARM coverage dipped slightly during the second quarter of 2013 to 1.9 times versus 2 times as of March 31. Trailing 12 month operator EBITDAR coverage, however, remained stable at 1.5 times as of June 30, 2013. The dip in EBITDARM coverage proved to be consistent trend throughout the country during the summer months and was attributable to a slight drop in quality census and the Medicare sequestration cuts.

Turning to new investments. Omega did not complete any new acquisitions during the third quarter of 2013. However, subsequent to September 30, the Company closed on two separate acquisitions totaling approximately $33 million. The investments involved a single 97 unit assisted-living facility in Florida and 4 skilled nursing facilities in Indiana with 384 bits. The facilities were simultaneously leased to two existing tenants of Omega.

In addition to these two new investments, on September 16, Omega filed an 8-K indicating that the Company had committed to invest $525 million in the proposed acquisition of Ark Holding Company by 4 West Holdings. The acquisition involved 56 nursing facilities located in 12 states. The acquisition is subject to the receipt of acceptable third-party reports and the transfer of all necessary licenses and permits. To date we have received a majority of the third-party reports, and have not been alerted to any material issues which would prevent Omega from closing.

In addition, all license applications have been filed with each respective state. While timing of licensure approval is difficult to predict, we are targeting a December close. The Company intends to use a combination of revolver availability and cash to fund the Ark acquisition.

In addition to the aforementioned new investments and the Ark transaction, Omega maintains an active pipeline of investment opportunities, some of which can close in the fourth quarter of 2013. As of today, Omega has a combination of revolver availability and cash totaling $632 million.

Thanks Dan. That concludes our prepared comments. We will now open the call up for questions.

Thank you.

(Operator Instructions)

Nick Yulico, UBS.

Thanks, good morning, everyone. Turning to the Ark acquisition, what was the -- I know it is still under contract, but what was the cash yield on that? What is that going to be -- the first year of cash yield?

We haven't talked about the cash yield. And as we have discussed previously, we announced the financing commitment for this transaction because it is relatively significant. But we obviously haven't closed, and there is a process that we have to go through to get to the closing, at which point we will go into a full detailed disclosure. At this time, we are limited under a confidentiality agreement with all the various parties.

I will say this, however, that the deal is consistent with our typical underwriting, where you look at cash yields of 9% to 10%, and you look at coverages about 1.4 times in a normal transaction. And this transaction is right in the middle of our underwriting.

Okay. And so it sounds like you are saying it is somewhere in the 9% type range perhaps?

Yes, as we've talked previously, that is where larger transactions are pricing in the market today.

Okay. And this is going to be -- the 10.7% yield would be a straight line -- that would be the FFO, and then we would have to -- the difference would be for versus if it is a 9% would be your adjustment for AFFO next year?

Correct.

Okay.

Or for FAD.

For FAD, right, okay.

Can you talk a little bit about -- again, I know it's unofficial, but can you talk a little bit about what is going on with -- a little bit more about the operator there? It sounds like there might be -- I think there's been some reports out there that you might be transitioning that to a new operator? Could you just -- as much as you could talk about that?

Yes, at this point, there's not a whole lot to say. I will say that the Ark management team, at least at this point, will for the most part stay in place. There's a financial advisor that will sort of oversee the operations. But for the most part, the existing company and the existing management team will be staying in place for Ark.

Okay, and then as far as -- you said the funding of this -- you're talking about using your line of credit and cash. How should we then think about -- are you then going to plan an unsecured bond raise in the first quarter to take down your line of credit? And where is pricing today you think for that, if you're dong that?

The bond pricing today is going to be south of 5.5% for a 10-year unsecured bond. We will do what we always have done, which is -- the cash will go on the line of credit, and then we will look at the various alternatives we have to take that down. Whether it is via equity or bond, and we are not going to know that until the time comes, and frankly, we are not going to know that until the deal closes. And as Dan had mentioned, we are targeting December, but we still have to get through the regulatory process.

Okay, and then can you just remind us how much is left on your ATM that you can issue -- how many shares?

We have $110 million left on the ATM.

$110 million left on the ATM?

Yes.

Okay, thanks.

Thank you.

Jeff Theiler, Green Street Advisors.

Good morning. Could you talk a little bit -- I know it's pretty small, but about the transitioned assets -- the 11 financed? What was the story there? And what was the rent due on the old lease versus what you expect to get on the new lease?

So that transition actually was a win-win for both sides. We had a tenant in Diversicare that really was looking to exit the state of Arkansas. And we had a local operator in Arkansas that was one of the larger operators -- was familiar with the state and had a large presence in the state that really was looking for new facilities. So we perceive that as an overall win-win, and the economics were slightly better in our new deal than they were in the old.

Okay. And just a question on coverages. It dipped a little bit this quarter. It is kind of hard to figure out, since there is only one decimal place reported, what the magnitude of that was? And would you expect a similar magnitude dip next quarter as another quarter rolls under the sequester?

It's hard to predict quarter to quarter, but it is pretty flat. Even -- because we round, the actual dip was negligible. Just is because of rounding that it actually fell off at all. But as far as third quarter goes, at this point it's too early to say with any surety, but it looks like it will remain flat

Okay. And then as you think about going into the future here, what kind of blended rate increases do you think you need for operators to maintain stable coverages as your leases continue to escalate? Is it the 1% range -- the 2% range? Can they cut costs at 0%? Or how do you think about it going forward?

I don't think there is a lot of room for cost cutting, Jeff. I think the whole industry has been through the process of shaking out, where they can, efficiencies on the expense side. So it's either going to be through rates or continued shift in quality mix, and increases in occupancy.

So if you maintain them essentially stable, you probably are looking at, as you said, somewhere between 1% and 2% revenue increases over time. Now, that's not to say that if you had a year where it was zero, you are going to immediately see it come through coverage, because everybody is going to work a little bit harder on the expense side. But I think from a long-term perspective, somewhere between 1% and 2% rate increases to maintain coverage ratios, is where we would be.

Okay, great. Thanks very much.

Thank you.

Daniel Bernstein, Stifel.

Good morning. I just wanted to ask a little bit more about the pipeline in terms of, in competition, of what you are seeing out there? Probably you are seeing Aviv, but who else is out there bidding on skilled nursing assets? Are the non-traded REITs active at all in the sector?

Yes, we are seeing the private guys active. Aviv, obviously -- Formation always. It is really the same cast of folks that we have seen over the last couple of years.

Are you seeing any cap rate pressure, or cap rates moving one way or another due to the lack of competition for assets?

Well, they certainly headed south at the beginning of the year, along with the overall interest rate environment. But we have seen the pressure of that ease up a little bit as of late.

Okay. And then, on the SGR, the sustainable growth rate fix -- that has been popping up in the news lately, that they may be looking at a more permanent fix. What are you hearing from the operators in terms of whether they would be happy to see that? Or are you hearing anything from Washington? Just trying to get your perspective on the SGR.

We haven't heard anything more from Washington than anybody else, that it is legislative, and who knows if you ever get that through Congress. From the operator perspective, the bulk of our operators would welcome a permanent fix, and knowing what it is they have to deal with in terms of what that fix meant in terms of future rates. I think the every-year Band-Aid is just a very tough way to manage the business.

Okay. And then, again, I know you are limited on what you can say about the Covenant Dove transaction, but if you had to relate that property portfolio to what you have in your portfolio today, how would you compare the portfolio to each other? Is it similar, or is it a much better portfolio than what you are looking at?

Dan, are you meaning in terms of the physical plan, or just overall?

It could be physical plan; it could be mix. When you integrate Covenant Dove, are your metrics going to change much in terms of skilled mix or -- I don't know how you want to describe that. Location -- just trying to understand what attracted you to the portfolio?

A lot of things. There is -- it is a good group of assets. The physical plants are at least as good as what we have today in our portfolio, perhaps slightly better. The mix is very similar. The geographic footprint is similar, although we are entering into a few new states, which are states that we have always wanted to be in. So there was a whole host of reasons why this deal was attractive for us, including scale, of course.

Okay. That's it for me. Thank you.

Thanks, Dan.

(Operator Instructions)

Harold Schafer, a private investor.

Hi, I would like to commend management first on the operation of OHI. As a stockholder, I am quite pleased.

The question I have is two. How many shares are outstanding as of this moment? And secondly, how do you perceive of the sequester a new healthcare law affecting OHI? Will it be more beneficial, less beneficial? Or, in your opinion, what do you think about it?

The number of shares outstanding today are 123.3 million shares.

And then, in terms of the Affordable Care Act, and the impact on our specific business, it is pretty limited. Most of our residents are already covered in one way or another, either via private insurance or through the Medicare program or through the Medicaid program. So when you think about the Affordable Care Act, and expanding insurance typically to a younger crowd, that really has limited affect in terms of what happens inside skilled nursing facilities, and what we do today and our economics.

That being said, there is one element of the Affordable Care Act that will affect our tenant partners, and that is the cost of insurance. It is not terribly significant, but it will affect the expense equation for a number of our operators, having to meet the mandate. Again, it is not going to really move coverages in a material way, but it is something that they all have to think about.

Mr. Schafer, was that your final question, sir?

Yes, I was quite pleased with all the answers. Thank you very much.

Thank you.

David Shamis, Jefferies.

Great, good morning, guys. Just a quick follow-up on the Advocate transition. I know you were saying that Advocate was looking to get out of Arkansas. Just wondering if part of the rationale behind that transition had to do with the operator maybe underperforming? I was just wondering if you could provide a little bit more color about their coverage, the coverage of the new operator, and then maybe if there's any operators within your portfolio that are sort of on your watch list?

No, we were not concerned about the coverage or the performance or the ability to pay of Advocate at all; they're, quite frankly, a good tenant. They wanted to exit the state of Arkansas because it happens to be a big liability state.

The new operator -- obviously they're taking over the same operations, but they did have expectations of improving the performance of the portfolio, and they have shown to us the facilities that they currently operate do quite well. So we expect that transition has gone well to date, and we expect them to perform.

But as far as Diversicare, we were not concerned at all about their performance or their ability to pay or anything of that nature. This was really, once again, a win-win. We took a portfolio of facilities that Diversicare really wanted to exit, and put them in the hands of somebody that really wanted to grow.

And just as a -- just to make sure everyone on the call realizes, Advocate, or Diversicare, continues to remain a substantial tenant. This was part of a master lease. They came to us looking to exit, so we negotiated a modest amendment to that master lease to move those facilities to an operator that we think is highly capable and has proven themselves highly capable of operating in the state.

Dan, there was a second half of that question about any potential operators that there is a concern with.

Yes, at this point, no, I think, while we had a slight dip in EBITDARM coverage, as we noted, all the operators' performance has been very stable and coverage have not swung. And we really don't have any of our big operators, or small operators for that matter, that are close or anywhere near the 1-to-1 where you start to get concerned.

Great. That's all I had. Thank you.

Thank you.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Taylor Pickett for his closing remarks.

Thanks. And thank you for joining our call this morning. Bob Stephenson will be available for any follow-up questions you may have.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.