Omega Healthcare Investors Inc (OHI) 2014 Q1 法說會逐字稿

Good morning and welcome to the Omega Healthcare Investors first quarter earnings conference call for 2014. 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 is event is being recorded. I would now like to turn the conference over to Tom Peterson. Please go ahead.

Thank you. 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, for profit or partnered operators, 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 the 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 websiteat www.omegahealthcare.com, and in the case of FFO and adjusted FFO in our press release issued day.

I would now current the call over to Taylor.

Thanks Tom. Good morning, and thank you for joining Omega's first quarter 2014 earnings conference call. Adjusted FFO for the first quarter is $0.71 per share, which is a 13% increase over 2013 first quarter adjusted FFO, of $0.63 per share. Adjusted funds available for distribution, FAD, for the quarter is $0.65 per share, which is a 14% increase over 2013 first quarter FAD of $0.57 per share. We increased our quarterly common dividend to $0.50 per share. This is a 2% increase from the last quarter, and a 9% increase from the first quarter 2013. We have now increased the dividend seven consecutive quarters. The dividend payout ratio is 70% of adjusted FFO and 77% of FAD. We have increased our 2014 FAD guidance range to $2.48 to $2.51 per share, and our 2014 adjusted FFO guidance range to $2.74 to $2.77 per share. We have not included acquisitions in our guidance. We estimate that every $100 million in new acquisitions will add approximately $0.025 to our annual FAD run rate, and $0.033 to our annual adjusted FFO run rate. As Bob will cover later in the call, we sold $400 million in new ten-year bonds. The proceeds were used to pay down comparatively inexpensive variable rate debt. The higher cut cost bond debt will increase our interest expense in the second quarter and beyond. We project that our quarterly adjusted FFO run rate will decline by approximately $0.03 per quarter.

Bob will now review our first quarter financial results.

Thank you Taylor. Good morning. Our reportable FFO on a dilutive basis was $84.4 million, or $0.68 per share for the quarter, as compared to $70.1 million, or $0.62 per share in the first quarter of 2013. As Taylor mentioned, our adjusted FFO was $88.8 million, or $0.71 per share for the quarter, and excludes the impact of $2.3 million of noncash stock-based compensation expense, $2 million of interest refinancing costs, $95,000 of expense associated with acquisitions, and a $16,000 recovery related to a provision for uncollectible notes receivable. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter was $121 million, versus $101.8 million for the first quarter of 2013. The increase was primarily a result of incremental revenue from a combination of new investments completed since the first quarter of 2013, capital improvements made to our facilities, and lease amendments made during that same time period. The $121 million of revenue for the quarter includes approximately $8.5 million of noncash revenue. We expect a noncash revenue component to be between $7.5 millionand $8.5 million per quarter for 2014.

Operating expense for the first quarter of 2014 when excluding acquisition-related costs, stock-based compensation expense, provisions for uncollectible accounts receivable, and interest rate refinancing costs, were $35.7 million, and was consistent with the first quarter of 2013. Our G&A was $4.2 million for the quarter, and we project our 2014 annual G&A expense will be between $16.5 million and $17 million with the growth primarily related to new investments completed in 2013. In addition, we expect our 2014 annual noncash stock-based compensation expense will be approximately $8.5 million.

Interest expense for the quarter, when excluding noncash deferred financing costs and refinancing costs was $27 million versus $25.8 million for the same period of 2013. The $1.2 million increase in interest expense resulted from higher debt balances associated with financings related to the new investments completed throughout 2013 and 2014.

Turning to the balance sheet, in March we issued and sold $400 million 4.95% senior unsecured notes due in 2024. Proceeds of this offering were used to repay and terminate our $200 million 2013 term loan and pay outstanding balances under our credit facility. As a result of the termination of our $200 million term loan during the quarter we reported $2 million of interest refinancing expense, to write-off deferred financing costs associated with the issuance of the term loan.

During the first quarter of 2014, we sold three facilities, two of which were closed and classified as held for sale, for a total of $3.6 million, generating a $2.9 million accounting gain. For the three-month period ended March 31, 2014, under our equity shelf program, and under our dividend reinvestment and common stock purchase plan, we issued a combined 1.9 million shares of common stock, generating gross cash proceeds of approximately $60 million.

For the three months ended March 31, 2014, our debt to adjusted pro forma annualized EBITDA was 4.4 times, and our adjusted fixed-charge coverage ratio was 4.2 times. As Taylor mentioned earlier our first quarter adjusted FFO and FAD run rate will be reduced by approximately $0.03, due to the completion of our March bond deal, and to a lesser extent timing related to the first quarter equity issuances.

I'll now turn the call over to Dan.

Thanks Bob, and good morning. As of March 31, 2014, Omega had a core asset portfolio of 547 facilities, with approximately 60,000 operating beds, distributed among 49 third party operators, located within 37 states. Trailing 12-month operator EBITDARM coverage remained stable during the fourth quarter of 2013, at 1.9 times versus 1.9 times as of September 30th. Trailing 12-month operator EBITDAR coverage dipped slightly from 1.5 times as of September 30th, to 1.4 times as of December 31. The modest decline is attributable to flat reimbursement rates, and a slight DIP in occupancy, coupled with a slight pick-up in operating expenses, including rent escalators. We expect overall portfolio coverage ratios to remain fairly stable over the course of 2014, as rates remain relatively flat, and our operators continue to undergo a constant stream of capital expenditure projects.

Turning to new investments, during the first quarter of 2014, Omega completed two separate transactions, totaling $117 million of new investments. On January 17th of 2014, the Company entered into a $112.5 million firstmortgage 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%. On January 30th of 2014, the Company acquired an assisted living facility in Arizona from an unrelated third-party for approximately $4.7 million. The 90-bed facility was added to the Master Lease of an existing operator. In addition to the $117 million of new investments the Company also invested $4 million under its capital renovation program in the first quarter. Omega continuous to see a steady pace of investment opportunities. As of today, Omega has a combination of revolver availability and cash totaling $548 million.

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

(Operator Instructions). Our first question comes from Daniel Bernstein at Stifel.

Hey guys, good morning.

Good morning, Dan.

On the acquisition front, I went to the March [Nick] regional and there were some talk about increasing competition for SNF assets there. I was wondering if you could talk about what you are seeing in terms of competition, where cap rates are heading, and maybe how you're adjusting your acquisition policy at all, to competition, if it's there?

We absolutely have seen more competition, more capital chasing product and as a result the type of cap rates and interest returns that we're getting on potential deals has gone down. We're not really seeing 10% deals in the market at all. And we've seen deals bid, as low as 8% for skilled nursing facilities. So that's a little bit of a shift. From our perspective, we continue to rely on our existing tenant partners to source deals and deploy capital. And I think that's even more important in an environment that's become much more competitive.

Are you shifting also away maybe from some of the larger deals like that Ark transaction, back to bread and butter, $25 million to $50 million deals that we saw a few years ago? Is that also perhaps something strategically you're going to do as well?

The Ark acquisition was obviously unique, right? So to the extent that we're positioned to take on a deal like that, we'll pursue it. But we are going to stick with our knitting, and our bread and butter deals are the smaller sizes deals that's are fed to us by our existing operators.

And also, then you just also mentioned on the lease coverage impacted a little bit by the rent increase, by your rent normal annual bumps, I was just trying to understand today where you stand, if I was to go ahead and model rent bumps through the year, how would I do that? Is it predominantly in the first quarter? Is it spread out evenly? How should I go ahead and think about when your rent bumps come into play?

They come in at all different times during the course of the year, because they're usually tied to whenever the lease was originally done and then they have one anniversary dates. So I think that our average bump is 2.5% and it really comes in over the course of the 12 months. So I would have it be steady throughout the year.

Okay. Is it all, what's the ratio of fixed to CPI bumps right now as well? I'm just trying to think back, I probably asked that question a little while ago, but you have made a lot of acquisitions since that point. What's your mix of CPI versus fixed bumps at this point?

It's almost exclusively fixed. We have a little bit of CPI left in the portfolio, but frankly from a modeling perspective I would just assume the whole portfolio is fixed.

Okay. 2.5?

2.5 is a good number.

Okay. Thanks a lot. Have a good day.

Thanks.

The next question comes from Nick Yulico at UBS.

Thanks. I just wanted to go back to the guidance. What did you say the straight-line and [DFL] adjustments were in this year? You said $7.5 million to $8 million a quarter?

For the noncash revenue, yes.

Is that the straight-line and the DFL adjustment?

Yes.

Okay. So I'm a bit confused as to how that could be the number, since last year you guys did call it around $27 million it looks like you had was the straight-line rent impact, you say it's gone up by $5 million this year, and seems like it should be going up more like $10 million from the Ark deal alone. Can you just provide the DFL number for the Ark deal for this year, the impact?

The Ark deal is about $10 million but what you have is you have a crossover point on your leases where the straight-lines and your cash is actually higher than your straight-line.

Okay. So the Ark deal, the impact is about $10 million for the year, and then you're saying that the rest of that, so if I just took your straight-line last year was $27 million, add $10 million, that's $37 million, you guys are saying it's going to be somewhere between $30 million and $32 million? What's the difference there?

It's the cash escalators within the leases.

Okay.

So if you just had a static environment, forget about acquisitions, over time and it's really not a long period of time, if we just froze our portfolio within three years we would eliminate that straight-line difference, because the cash escalators catch up to the gap revenue that's recorded.

Okay. I'm just trying to understand if you're saying it's 2.5 is your annual bump, then why is your straight-line going from $27 million last year down to, shouldn't it be going down by 2.5%? It's a bigger impact you guys are talking about.

You have to take 2.5% of the total revenue base, which is just for sake of this discussion is approaching $500 million. So $500 million times 2.5% is $12.5 million. So in very really broad global terms, you would expect that gap to close at about $12.5 million per year. Now those escalators come in over time, and you have the impact of as an example the Guardian acquisition in Q1, which has some straight-line within that. So it really comes down to that's why I said when you think about $30 million of straight-line, if we froze the portfolio within three years that straight-line would be zero, the difference would be zero.

Okay. Got it. And then one other question I was just on the term loan, I'm a bit confused, it looks like it still showed up on the balance sheet in the first quarter. I think you guys repaid it.

We actually had two term loans, we had a $700 million credit facility, which a component of it was a $200 million term loan, and there was a second term loan placed in December of 2013 had that had a deferred draw on it. We did not draw on that until January, and then we paid that off.

Okay. So you paid off the new term loan?

That's correct.

Okay. And you kept the old one?

The old one is part of our overall credit facility that we had in place for a few years.

Okay. Got you. And then was there not enough, I forget here was there not enough on the old -- was there not enough room on the revolver to do the Ark deal? To go back in time, I'm just trying to figure out what was the purpose of getting a new term loan?

That's exactly right. We had a $500 million revolver, and you think about Ark as a $0.5 billion deal, we wanted to at least make sure we had flexibility for as an example the transaction we closed in January for $112 million. We knew that it was coming. We knew we had to go to capital markets, so we wanted essentially that $200 million piece of term that was temporary, it was a bridge to make sure we could get to the capital markets, and to ensure we could get that deal in January closed.

Okay. Got you. And then just one last question going back to the coverage, you guys only report those sort of one decimal point of coverage, so when we look at this it looks like in the 12 months ending December, the coverage after management fees was 1.4, and it was sort of 1.5 going back a year before that. How should we think about that? Has coverage been sort of steadily declining, and then just got to the point where it rounded to 1.4? Or was there something big that kind of happened in fourth quarter operator numbers that drove the coverage down?

Yes, nothing happened. It was just a modest rounding error, not rounding error, but just a rounding issue. Going from the 1.5 to the 1.4. The actual dip was very, very small.

Okay. Got you. Thanks.

Thank you.

(Operator Instructions). And our next question comes from Jeff Theiler at Green Street Advisors.

Good morning. Can you provide a little bit more detail on the revised 2014 AFFO forecast? Specifically what changed from last quarter that caused that to increase?

Which forecast? I'm sorry, Jeff.

I just missed it. The 2014 adjusted FFO guidance?

Well, the principle change from our perspective is when we thought about doing a bond deal, which was part of our guidance thinking at the beginning of the year we thought that we were going to catch a rate that was higher than 5%. We thought we would be looking at 5.625% and 5.75%, and so there was a fairly significant interest tick up, if you will, from where we had forecast we would come in with that bond deal. And so that flows through as a few cents of upside.

Right. Is there anything else on top of that? Because I mean I assumed that was probably part of it, but it seems like it would be bigger than just that adjustment?

Yes, but when you think about 0.75% on $400 million, that is most of what we're talking about.

Okay. Great. Thank you. Can you clarify the cap rate on that single ELF acquisition that you just did?

It was 9.7%.

Okay. And then I guess what's the rationale for acquiring Alison General? It seems like it might have been a one-off but I think you mentioned last call that you would think about doing ELF acquisitions, even with operators that you don't have a current skilled nursing relationship with, when I look at your performance since the end of the Recession, you have outperformed the entire peer group pretty meaningfully. Is it just the cap rates in SNFs have kind of moved past the risk/reward ratio for you? How are you thinking about that?

I think there are a couple of components. One is that a lot of the assisted living that we've done to date fits in with existing portfolios and markets. Both from leveraging off the management skill sets, and to a lesser extent but it still happens from a referral perspective. From our viewpoint, we have seen cap rates skinny down on the SNF side so the risk assessment in terms of allocating capital changes a little bit. That being said, we're going to dedicate as much capital as there is product available in the SNF space for us. And to the extent that we see opportunities in assisted living, whether within our existing tenant partners or outside, we'll look at those a little bit harder.

Okay. Last one from me, can you clarify on this new mortgage loan investment you did in January, I had originally thought they were skilled nursing facilities, but it seems that there are maybe two ALFs associated with that. What's the break out? $112.5 million mortgage loan, in your earnings release it says secured by 7 SNFs and 2 ALFs, but I think you said 9 SNFs just in your remarks?

Yes, there are some ALF components of the some of the facilities. You can look at it differently. But yes there are ALF components. I don't have the number of unities within the 784 but there are some ALF units in that acquisition.

Okay. So it's 7, should I be thinking about that as nine skilled nursing facilities or seven SNFs and two assisted living facilities?

Seven and two is okay.

Okay. Thank you very much.

Thank you.

At this time we show no further questions, and I would like to turn the conference back over to Mr. Pickett for any closing remarks.

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

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