Omega Healthcare Investors Inc (OHI) 2013 Q4 法說會逐字稿

Good day and welcome to the Omega Healthcare Investors fourth quarter 2013 earnings call and webcast. 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 that 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 conditions 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 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, FDA and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under General Accepted Accounting Principals, as well as an explanation of the usefulness of the non-GAAP measures are available under the Financial 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 fourth quarter 2013 earnings conference call. Adjusted FFO for the fourth quarter is $0.65 per share, which is a 12% increase of 2012 fourth quarter adjusted FFO of $0.58 per share. Normalized Funds Available for Distribution FAD for the quarter is $0.59 per share. We increased our quarterly common dividend to $0.49 per share, this is a 2.1% increase from last quarter, and a 9% increase from the fourth quarter 2012. We have now increased the dividend six consecutive quarters. The dividend payout ratio is 75% of adjusted FFO, and 83% of FAD.

We have announced our 2014 FAD guidance range of $2.44 to $2.47 per share, and 2014 adjusted FFO guidance range of $2.69 to $2.72 per share. We have not included acquisitions in our guidance except for the $113 million First Mortgage loan closed in January. We estimate that every $100 million in new acquisitions will add approximately $0.025 to our FAD run rate on a annualized basis, and $0.033 to our adjusted FFO run rate, also on an annualized basis.

As a deal flow reminder, we have made new investments of over $2 billion in the last four years. Our pipeline remains fairly active, but as in prior years, acquisition activity will likely be chopped. Bob will now review our fourth quarter financial results.

Thank you Taylor, and good morning. Our reportable FFO on a diluted basis was $79.9 million, or $0.65 per share for the quarter, as compared to $61.4 million, or $0.55 per share in the fourth quarter of 2012.

As Taylor mentioned, our adjusted FFO was $79.9 million, or $0.65 per share for the quarter, and excludes the impact of $1.5 million of non-cash stock based compensation expense, $1.4 million of one-time revenue, $200,000 recovery related to the provision for uncollected notes receivable, and $100,000 of expense associated with acquisitions. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter was $111.1 million versus $95 million for the fourth quarter of 2012. The increase was primarily a result of incremental lease revenue from a combination of acquisitions completed since late fourth quarter of 2012, capital improvements made to our facilities and lease amendments made during that same time period. The $111 million of revenue for the quarter includes approximately $8.3 million of non-cash revenue. We expect the non-cash revenue component to be between $7 million to $8 million per quarter for 2014.

Operating expense for the fourth quarter of 2013 when excluding acquisition-related costs, stock-based compensation expense, impairment charges, and the provision for uncollectible Accounts Receivable increased by $1.7 million, as compared to the fourth quarter of 2012. The increase was primarily a result of increased depreciation and amortization expenses related to closing approximately $846 million of new investments since mid-fourth quarter of 2012, and a slight decrease in our G&A expense due to timing.

We project our 2014 annual G&A expense, excluding stock-based compensation expense will be between $16.5 million and $17 million and the growth primarily related to new investments completed over the past twelve months. In addition, we expect our 2014 annual non-cash stock-based compensation expense will be approximately $8.6 million. Interest expense for the quarter, when excluding non-cash deferred financing cost was $25.3 million versus $24.5 million for the same period in 2012. The $800,000 increase resulted from higher debt balances associated with the financings related to the new investments completed in 2013.

Turning to the balance sheet for the year. In March, we refinanced approximately $59 million of debt related to twelve mortgage loans guaranteed by the Department of Housing and Urban Development. The twelve HUD mortgage loans had a blended interest rate of 5.5% per annum with maturities in July of 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 eleven 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 fair market value of debt classified as interest refinancing cost on our income statement. In October, in an underwritten public offering, we issued 2.875 million shares of common stock, generating net cash proceeds of $85 million. During the fourth quarter of 2013, we completed $561 million of new investments. Dan will go over these in a few minutes. The new investments were financed primarily with borrowings under our $500 million unsecured credit facility and balance sheet cash.

In late December, we closed on a $200 million term loan priced at LIBOR plus 175 basis points, which is short liquidity for potential new investments. At December 31st, the new term loan which completely available for use. In January, we borrowed the entire $200 million, and used the proceeds to repay borrowings on our credit facilities. We plan to look to the capital markets in the first part of 2014 for long-term financing. For the year ended December 31, 2013, under our equity shelf program and our dividend reinvestment and common stock purchase plan, we issued a combined 8.4 million shares of common stock, generating gross cash proceeds of $254 million. For the three months ended December 31, 2013, our funded debt to total asset ratio was 46%, and our funded debt to adjusted annualized EBITDA was 4.7 times, and finally, our adjusted fixed charge coverage ratio was 4.1 times.

I will now turn the call over to Dan.

Thanks Bob, and good morning everyone. As of December 31, 2013, Omega had a core asset portfolio of 538 facilities, with 58,885 operating beds, distributed among 49 third-party operators, located within 37 states. Trailing 12-month operator EBITDAR coverage remained stable as September 30, 2013 at 1.9 times versus 1.9 times as of June 30th, trailing 12-month operating EBITDAR coverage also remained stable at 1.5 times versus 1.5 times as of June 30th.

Turning to new investments. During the fourth quarter of 2013, Omega completed $569 million of new investments including capital expenditures. The investments involved three separate transactions and included the previous announced Ark transaction. On November 27, 2013, the Company completed a $529 million sale lease back transaction for 56 facilities operated by Ark Holding Company, as part of the transaction, Omega acquired title to 55 skilled nursing facilities and one assisted living facility, and leased them back to the prior operators, pursuant to four 50-year capital lease agreements, with rental payments to Omega yielding 10.6% per annum over the term of the lease.

The 56 facilities represent 5,624 licensed beds located in 12 states, predominantly in the southeastern United States. The 56 facilities are separated by region and divided amongst four cross defaulted master leases. The four regions include the Southeast, the Northwest, Texas, and Indiana. The initial year one contractual rent is $47 million, with 2.5% escalators beginning in year five.

In addition to the Ark transaction, the Company completed two separate acquisitions in October, with two existing operators, totaling $33 million. The acquisitions consisted of one assisted living facility in Florida, and four skilled nursing facilities located in Indiana. Each of the facilities was added to existing master leases.

Subsequent for the end of 2013, on January 17, 2014, the Company entered into a $112.5 million First Mortgage loan with an existing operator of the Company. The loan is secured by nine skilled nursing facilities, totaling 784 operating beds located in Pennsylvania and Ohio. The loan is cross defaulted and cross collateralized with the Company's existing master lease with the operator. The loan bears an initial annual interest rate of 9.5%. Omega continues to see a steady pace of investment opportunities. As of today, Omega has a combination of revolver availability and cash totaling $325 million.

Thanks, Dan. Andrew, we are ready to open up for questions.

(Operator Instructions). The first question comes from Jeff Theiler of Green Street Advisors. Please go ahead.

Hey, good morning. Your most recent investment was this first mortgage loan, and the Ark investment had no escalators for the first five years. Is this the start of a pattern? Are you thinking about moving away from the typical 2% rent bumps we have seen for skilled nursing investments, because of low growth and provider payments, or is it just a coincidence that this is the way that these two investments are structured?

Really just coincidence. The Ark deal obviously very big and very long term, and so that was just part of the negotiation of the underlying economics. The first mortgage has escalators, so it is consistent with the master lease that it is crossed into it, so that is I would say more traditional in terms of the economics.

What are the escalators on the first mortgage?

2%.

2%. And what is the interest coverage on the first mortgage?

Is it in excess of 1.4 times.

So Jeff, consistent with our typical underwriting per lease.

Got you. And can you just give a quick commentary on cap rates, what you are seeing out there in the market, whether they look to be trending down or flatter?

I would say they are relatively flat. We worked down into 9s last year, and in terms of cash flow and cash, and I think our view is that is where they are going to be this year, for the foreseeable future. There is a fair amount of capital, not any of the large guys, but there is still a fair amount of capital out there looking at SNF assets.

Okay. Great. Thanks very much.

Thanks, Jeff.

The next question comes from Daniel Bernstein of Stifel. Please go ahead.

Good morning.

Good morning, Dan.

I didn't hear. Can you provide the term, the actual maturity date of the loan that you did in the first quarter?

It was ten years initial term.

It was ten years?

Yes.

Okay. In terms of the acquisition opportunities out there. Are you seeing a lot of these larger acquisitions like Ark, or are you seeing more of the bread and butter, $25 million, $50 million opportunities that you have traditionally done? Also, just trying to understand where these sellers are coming from?Is it more private equity? Is it the smaller operators having trouble dealing with reimbursement changes? Just trying to understand what is driving the acquisition market today?

Yes, we are not seeing a lot of deals the size of Ark, I would say that. There are just not a lot of private operators that hold that many assets, number one. I would say we are seeing more of the $50 million to $100 million deal size, which has sort of been our bread and butter for the last several years. Sellers, traditionally more mom and pops. There is obviously a lot of different pressure on them coming from a lot of different directions, and over time, these folks it is still a very fragmented industry, one by one are slowly deciding to sell out, so that is what we expect to see at least in the short run.

Do you think the operation will come back up a little bit, if you start doing a little bit more on the smaller operator transactions, rather than the Ark sized transactions, do you think the rates will back up a little bit, or are we stuck in this 9s area that you mentioned?

I think given the amount of capital that is still out in the marketplace, something in the 9s, 9.5. You will occasionally see stuff that pushes towards 10, but I don't see many transactions being done at 10% as an example.

Okay. In terms of the capital structure, are you still thinking long term about 50/50 debt to equity. I don't remember what you said in terms of debt to EBITDA, but has anything changed in terms of your thoughts of capital structure, for whatever reason?

No. We will continue to be modestly levered debt to EBITDA in that 4 to 5 times range, and the math there is 50/50 debt to equity over time. There is really no change there.

And no change in terms of you used the term loan in the first quarter versus going out in the unsecured market. Are you thinking you want to decrease your debt maturity length on your balance sheet, debt duration on your balance sheet, or is that really just a circumstance of the cost? I am just trying to understand, you are going to use a little bit shorter term debt versus longer term debt, given the increase in interest rates?

No, I think we are going to continue to go long. Bob mentioned in the first part of this year we are going look at long-term financing for our existing borrowings, our existing short-term borrowings including that $200 million piece of term debt. So part of our guidance included the expectation that we will have permanent financing in place at some point, early point of 2014 to fully open up the revolver, and take out that little $200 million term loan.

There are no prepayment penalties on these that you are worried about?

No, it is effectively a bridge, because we knew we had $113 million closing, and as Dan mentioned, the pipeline is pretty active.

Alright. Sounds good to me. I will hop off. Thank you.

Thanks, Dan.

(Operator Instructions). The next question comes from Tayo Okusanya of Jefferies. Please go ahead.

Good morning, everyone. Was just hoping you could talk a little bit about Genesis in particular, and how things are going there with some of their cost restructuring programs?They kind of talked in the fourth quarter about census potentially being a little bit light. I am curious what you were hearing from them?

For our part of the Genesis portfolio, we have seen a little bit of dip in occupancy, but nothing of any significance. Dan, I don't --

Which is consistent with what we have seen. Genesis has come out and indicated some softening in occupancy, but we have seen that across the board, really not just our portfolio, but from other operators and across the country, but it has been very, very modest, and hasn't really materially affected coverages from where we sit.

Okay, that is helpful. I know it is still six months early, but generally any sense you are getting from states in regards to the overall fiscal conditions, what they may be doing in regards to Medicaid rates come July 1st?

We feel pretty good about what we are hearing at the state level, and as you said, it is still a little early to fully predict it, but our view today is that we should see modest increases, 1%, 2%, 2.5% type of increases in general across the states with budgets in relatively good shape. So on the Medicaid side of the coin, we feel pretty good that that is going to be steady.

One final question. Any thought just in regards, there was a recent Wall Street journal article a few days ago that was kind of talking about ACUs, and the mixed results that they have actually had in regards to saving money. Just curious what your thoughts are on that? If you think ACU ultimately will have some type of impact on the skilled nursing industry, or whether it is just way too early to tell?

I think it is a little early to tell. It was an interesting article in that in that article it was a little bit difficult to glean what percentage the savings were. They talked about what was 100-some odd million. Okay, out of what was the full bucket in terms of what were they measuring. It wasn't totally clear to us.

I think the great news is in one form or another, skilled nursing facilities are going to be an integral part, because it is still by far the cheapest setting to do from a Medicare perspective, but it was an interesting article as you point out, because I think there was an expectation for larger savings, or at least broader savings, and it remains to be seen.

Thank you very much.

Thanks, Tayo.

The next question comes from John Roberts of Hilliard Lyons. Please go ahead.

Alright, good morning. Can you go a little bit more maybe into the size and composition of the acquisition pipeline?

The size is, once again, we are looking at a number of deals as far as the range of deals. It is anywhere from a few million dollars on one-off deals, to I would say up to $100 million deals. What is the size that we are underwriting today? It is not billions. It is in the hundreds of millions, but that is just when we talk about pipeline, we talk about what we are looking at, not what we have underwritten and signed term sheets on. That moves up and down quite a bit depending on where we are during a calendar year, and what size deals we are looking at. Obviously, a large deal would impact that tremendously. I would say, once again, it is choppy, there are a bunch of deals out in the market, and they are the typical size that we normally see, which is sort of the $5 million to $100 million range.

Just to add to that a little bit. As far as I know, there are no Ark sized deals floating around that we are aware of.

The bulk of it I would assume is SNFs? You did an ALF in Q4, but that is probably not something that you are normally going do?

We did an ALF in Q4, we did an ALF in Q1, and we will continue to do some ALFs to the extent that we have an opportunity just to do them. I don't know if we will get an opportunity to bid on the gigantic ALF transactions, if they are ever any more to come down the road, but we will aggressively bid on ALF deals, particularly if it rounds out a market for one of our existing operators.

So you will do them more selectively within existing geographic areas, or with existing operators?

I will expand upon that. If we come upon an assisted living operator that we work well with, and that we can develop a relationship with, we will certainly entertain doing a transaction of that type without the existence of an existing SNF relationship.

Very good. Thank you.

Thank you.

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

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

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