Omega Healthcare Investors Inc (OHI) 2014 Q2 法說會逐字稿

Good morning and welcome to the Omega Healthcare second-quarter earnings call for 2014. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Michele 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 may be forward-looking statements such as statements regarding our financial and FFO projections, dividend policy, portfolio restructurings, 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 Michele. Good morning and thank you for joining Omega's second-quarter 2014 earnings conference call.

Adjusted FFO for the second quarter is $0.69 per share, which is a $0.02 decrease from first quarter adjusted FFO of $0.71 per share. Adjusted funds available for distribution, FAD, for the quarter is $0.63 per share, which is also a $0.02 decrease from first quarter FAD of $0.65 per share. The decrease in adjusted FFO and FAD is directly related to $400 million in new 10-year bonds sold in March. The proceeds from the bond sale were used to pay down comparatively inexpensive variable-rate debt, which in turn increased interest expense in the second quarter.

We increased our quarterly common dividend to $0.51 per share. This is a 2% increase from last quarter and a 9% increase from the second quarter 2013. We've now increased the dividend eight consecutive quarters. The dividend payout ratio is 74% of adjusted FFO and 81% of FAD.

We've increased our 2014 FAD guidance to a range of $2.58 to $2.61 per share and 2014 adjusted FFO guidance to a range of $2.82 to $2.85 per share. We've not included acquisitions in our guidance.

Based on our actual adjusted FFO of $1.40 for the first six months of 2014 and our new four-year guidance of $2.82 to $2.85 per share, our third- and fourth-quarter adjusted FFO per share is expected to be $0.71 to $0.72 per quarter. The expected increase in third- and fourth-quarter adjusted FFO is directly related to the new investments made at the end of the second quarter.

Bob will now review our second-quarter financial results.

Thank you Taylor and good morning.

Our reportable FFO on a diluted basis was $79.7 million or $0.63 per share for the quarter as compared to $82.4 million or $0.70 per share in the second quarter of 2013. As Taylor mentioned, our adjusted FFO was $87.4 million or $0.69 per share for the quarter and excludes the impact of $2.3 million of noncash stock-based compensation expense, $2.6 million of interest rate financing cost, $2.8 million in provisions for uncollectable accounts and notes receivable, and $45,000 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 $121.8 million versus $102.5 million for the second quarter of 2013. The increase was primarily a result of incremental revenue from a combination of new investments completed since the second quarter of 2013, capital improvements made to our facilities, and lease amendments made during that same time period. The $121.8 million of revenue for the quarter includes approximately $8.7 million of noncash revenue. We expect the noncash revenue component to be between $8.5 million to $9.5 million per quarter for the remainder of 2014 and 2015.

Operating expense for the second quarter of 2014 when excluding acquisition-related costs, stock-based compensation expense, impairments, and provision for uncollectible accounts receivable, was $35.3 million and was consistent with the second quarter of 2013. Our G&A was $4 million for the quarter and we project our 2014 annual G&A expense to be between $16.5 million to $17 million with the growth primarily related to the completion of new investments.

In addition, we expect our 2014 annual noncash stock-based compensation expense to be approximately $8.5 million based on our current stock price. As outlined in our press release issued yesterday, during the quarter we reported a $2.8 million provision for uncollectible straight-line accounts receivable. The noncash charge included $800,000 resulting from the transition of two West Virginia facilities from Advocate to a new third-party operator and a $2 million of noncash straight-line mortgage interest income resulting from the consolidation of the new mortgages with Ciena.

Interest expense for the quarter when excluding noncash deferred financing cost and refinancing costs was $29.4 million versus $25 million for the same period in 2013. The $4.4 million increase in interest expense resulted from higher debt balances associated with financings related to the new investments completed in 2013 and 2014.

Turning to the balance sheet for the year, during the second quarter we completed $315 million of new investments. Dan will go over these in a few minutes. The new investments were financed primarily by borrowings under a new $1.2 billion unsecured credit facility entered into in June of 2014. The $1.2 billion credit facility is made up of a $1 billion four-year revolver and a $200 million five-year term loan. Both are priced at LIBOR plus an applicable percentage based on the Company's ratings from two of the three rating agencies. As a result of entering into our 2014 credit facility and terminating our 2012 credit facility, in the second quarter of 2014 we recorded a noncash charge of approximately $2.6 million related to the write-off of deferred financing costs associated with the 2012 credit facility.

In March of 2014, we issued and sold 400 million 4.95% senior unsecured notes due 2024. Proceeds from that offering were used to repay and terminate our $200 million 2013 term loan and pay outstanding balances under the 2012 credit facility. As a result of terminating our $200 million term loan during the first quarter of 2014, we recorded a $2 million interest refinancing expense to write off deferred financing costs associated with the issuance of the 2013 term loan.

For the six-months period ended June 30, 2014 under our equity shelf programs and our dividend reinvestment in common stock purchase plan, we issued a combined 3.1 million shares of our common stock generating gross cash proceeds of approximately $104 million. For the three-months ended June 30, 2014 our funded debt to adjusted pro forma annualized EBITDA was 4.7 times and our adjusted fixed-charge coverage ratio was 3.9 times.

I'll now turn the call over to Dan.

Thanks Bob and good morning everyone.

As of the end of the second quarter 2014, Omega had a core asset portfolio of 563 facilities with approximately 61,000 operating beds distributed among 49 third-party operators located within 37 states. Trailing 12-month operator EBITDARM coverage dipped slightly during the first quarter from 1.9 times as of December 31, 2013 to 1.8 times as of March 31, 2014. Trailing 12-month operator EBITDAR coverage remained stable at 1.4 times versus 1.4 times as of March 31.

While the sector as a whole has seen a slight decline in census and quality payer mix, Omega's coverage decline has stemmed more from our ongoing capital expenditure projects, which have taken numerous beds out of service. Once again, we remain optimistic that our overall portfolio coverage ratios will remain relatively steady over the course of 2014.

Turning to new investments, during the second quarter of 2014 Omega completed $320 million of new investments including capital expenditures. The investments involved two separate transactions. As previously reported on June 27, 2014, the Company purchased two skilled nursing facilities from an unrelated third party for approximately $17 million and leased them to an existing operator of the Company. The skilled nursing facilities, located in Georgia and South Carolina totaling 213 beds, were combined into a 12-year master lease with an initial cash yield of 9.5%.

On June 30, 2014, the Company closed on a new $415 million mortgage, which is secured by 31 facilities totaling 3,430 licensed beds, all located in the State of Michigan. The new loan bears an initial annual cash interest rate of 9% which increases by 2.25% each year. The loan includes the partial refinance and consolidation of 17 facilities into one mortgage while simultaneously providing mortgage financing for an additional 14 facilities.

In addition to the aforementioned transactions, the Company also invested $5 million under its capital renovation program in the second quarter. Subsequent to the end of the second quarter on July 1, 2014 the Company purchased one skilled nursing facility from an unrelated third party for approximately $8.2 million and leased it to an existing operator of the Company. The skilled nursing facility, located in Texas and totaling 125 beds, was added to the operator's existing master lease with an initial cash yield of 9.75%.

Omega continues to see a steady pace of investment opportunities. As of today, Omega had a combination of revolver availability and cash totaling $793 million.

Thanks Dan. That concludes our prepared comments. We'll now open the call to questions.

We will now being the question and answer session. (Operator Instructions) The first question comes from Nick Yulico from UBS Investment Bank. Please go ahead.

Thanks. I have a couple questions, one on the recent loan investment you did with $415 million with I think that with was Ciena Healthcare. Could you tell us what the FFO or GAAP yield you're going to be booking on that? I know you said 9% cash but I think it's going to be straight-line, I assume?

There is a straight-line component. Where'd that end up?

Ten.

Ten. It's just a touch over 10, Nick.

Okay, over 10? At little over 10? Can you also just tell us what the term -- I didn't see the term of that loan. And then as well, maybe if you could talk a little bit about the loan-to-value and the coverage metrics for that loan since it's now a pretty large exposure that you have?

It's a 15-year loan. It's locked out for 10 years. So there's no ability to prepay in the first 10 years. The coverage ratio for the overall portfolio is approximately 1.5 times at the time that we booked the loan. And the loan-to-value [left,] I don't -- it was about 90%.

Okay, about 90%? So the 1.5 times coverage is that -- that is based on your loan exposure? Is that right?

Correct. Based on our interest expense.

Okay. Got you. Could you also go through some of the components of the guidance increase? I know, obviously I guess some of it would be due to the investments, but maybe if you could just break out a couple of the pieces that are resulting in the guidance change?

I think the major component is Ciena. We don't have at our fingertips each of those little moving parts but I would suggest you just call Bob and he can break that down for you. But the short answer is Ciena is the driver of the change.

Okay. And then is the assumption on the way that you're going to sort of permanently finance this investment, I mean, are you assuming -- you're assuming some equity raising on the ATM in the back-half of the year. And is there any other debt assumptions to reduce what looks like your leverage having gone up with this deal?

Well our leverage still continues to be pretty -- it's in our band. But as we think about capital markets, our view hasn't changed. We will continue to use the ATM. Our pipeline continues to be active. So we're going to be using the ATM because we have deals they are going to cross the threshold throughout the rest of the year. And we'll look at a bond market as a possibility, but we really haven't made any decisions as it relates to how we go at that.

Okay, and then just two other ones. Is it possible to get the -- what your new guidance is for FFO for the year, not your adjusted FFO or your FAD, but actual FFO?

I think that's part of that reconciliation right, Bob?

Yes. It's in the press release. Nick, I'll have to give you a call back and we'll walk you multiple speakers --

Okay, no problem. I'll take a look at that. And then, just lastly one other question I had was -- I'm wondering why you think it's appropriate to add back the straight-line rent write-offs when you're calculating your adjusted FFO (inaudible)? I know it makes sense to add them back from a FAD cash standpoint, but didn't you essentially overbook your FFO from straight-lining a loan that you never collected all the money on?

Well, I mean from our perspective it's -- where's the run rate on a forward basis? And some of that's just straight accounting, right? Where we still have the relationship, it's got to reset. And you look at this write-off and go -- the relationship just got bigger but the accounting rules require us to take a component of it and write it off.

You know, frankly, the way we look at it is, we're going to disclose it all and people can do what they want with the numbers. But we think about it in terms of how do we look at our run rate on a forward basis. And all the data's there. So if somebody says -- we don't like that, fine, take the add-back out.

No, I've got it. It just it seems from my -- from our standpoint you have a now a fairly sizeable loan book, and you have a legacy mortgage investment book that has much higher yields within where you seem to be writing loans today. So in the future if you have to again kind of refinance an operator loan, it just seems like there's -- this could happen again. And so the FFO today is a little bit -- could be too high if that's the case.

No, I think Ciena actually is incredibly unique in our portfolio in terms of what you just described. I think it is unusual and that's -- what you described is something that probably won't happen again in the future.

Oh, okay, okay. Fair enough. Thanks.

Thanks.

The next question comes from Tayo Okusanya from Jeffries. Please go ahead.

Yes. Good morning. Just a couple of quick ones. First of all, the loan book again, just -- yes, the Ciena deal is a pretty large one. When you take a look at the loan book right now as a percentage of your total assets and it's pretty big. And I'm just curious going forward how we should be thinking about the loan book versus you guys actually buying assets, whether they're still -- whether you're seeing better returns in the loan book and that business may continue to grow or whether going forward the loan book -- you'd expect the size of the loan book to actually shrink?

As we've discussed in the past, loans tend to be driven by relationships and related financial needs, whether it's tax related or reimbursement related or otherwise. So I would think that -- it's hard to predict loans as we talk about them in terms of maintaining relationships and doing the right thing from our partners' perspective. I would say right now, we don't have any others in the pipeline, Dan, right?

That's correct.

And the ones that we have are purely relationship driven and I will note that from a credit perspective they're structured just like leases.

Right.

So from a credit perspective we feel very comfortable with that book being the same as our lease book. In terms of future prospects for more, it's not -- there are accommodations. That's not our normal course of business but we're going to do what's right for our partners. Nothing in the pipeline now, no expectation, so odds are it goes down as a percentage. But I wouldn't -- I mean -- who knows?

It's hard to predict. Yes.

What comes our way. Right.

Okay. That's helpful and then the other question is, in regards to the transitioning of the two West Virginia SNFs and also closing down the facility in Indiana, just was wondering if you give a little bit more color about, kind of, what precipitated those two transactions?

Yes. So the transition of the two facilities in West Virginia was really more strategic than anything else. They certainly weren't troubled facilities. We had an operator that decided to exit the state. And we were accommodating in that we found an operator who does a lot of business in the state and was anxious to take over those facility operations. So for us that was a -- that really was strategic in nature. We shifted from an operator who really didn't want to be there to an operator that really did want to be there and already has a very large presence there.

So, as far as the facility that was closed down, that was a unique facility to our portfolio. It's designated as an intermediate care facility for the developmentally disabled and it's licensed as such and it cared for as such. Now, there's sort of an ongoing movement afoot in the country to close these institutions down and put them in smaller settings, namely group homes.

Indiana has effectively done that completely. This was actually the last facility of its type to close down. It was going to happen eventually. We just didn't know the timing. It was one facility that was part of a two facility lease. Our rent does not change. The overall rent's very nominal anyhow. It's just over $0.5 million a year. So, I mean, that was the story there. The State actually required the shutdown of that facility because they are really transitioning those types of residents from institutional settings to group homes.

Very helpful. Thank you.

Thanks Tayo.

The next question comes from Michael Knott from Green Street Advisors. Please go ahead.

Hey Everybody. Good morning. Question for you just on your acquisition pipeline going forward and how you think about whether we'll see more relationship-type deals like your Texas deal this quarter or maybe larger portfolio deals like [Ark]?

So the pipeline right now consists mostly of smaller type deals with our existing -- that are sourced from our existing tenants. I will note, however, that there are a number of what I would call sizeable transactions in the market. Many of them are widely marketed and those are tough transactions to handicap. But I will say there's a steady flow of smaller-type transactions in the pipeline with our existing tenants. And, depending on how the market conditions break, some of these larger transactions do -- you know, we are going to look to be opportunistic. But once again, it's hard to predict those larger transactions.

Any ballpark guidance on size of maybe those larger transactions and then also maybe your sense of what the yield difference might be between a widely marketed larger deal versus the 9.75 that you reported on the Texas transaction, to the extent that's representative of where the smaller one-off deal market is today.

Yes. I think the smaller one-off deal market is in the 9s. I think the days of the 10s are probably rare at this point. So those deals I think will start with a 9 handle. The larger widely marketed deals are really going to trade more like the cap rates of your similar size public REITS. So you're talking about 7 and thereabouts. The rates will be much lower. And the size, you know, up to and through $1 billion.

Wow, that sounds pretty large. And then just on your coverages, a couple of questions for you. I just was hoping you could touch on some of the positive and negative forces at work that you think about every day when you go to work that are affecting your coverages. And then just any more color on the EBITDAR versus EBITDARM coverages, this quarter the EBITDARM falling a little bit. You touched on it in your comments a little bit but just curious if you have any more color on that?

Yes. The difference between EBITDAR and EBITDARM has historically been just a little bit north of 0.4, so it's really just sort of a -- those two sort of aligning. There wasn't any dramatic changes in the EBITDARM coverage.

What moves the dial a little bit obviously, we've got a number of capital projects happening. There is a lot of lead time for a number of those capital projects so you might have to take an entire wing out of service before you'd even start construction. So it's hard to pinpoint how that's going to affect any given facility. But I can just say that we have a number of those projects ongoing and they do affect coverages.

And we don't -- some of our peers I believe actually carve that out of what they call their stabilized coverage ratios. We don't. We keep them in for good or for bad whether it's a conversion or a new build for that matter. So those will affect coverages.

Certainly we have had one or two incidences of facilities being closed or having survey issues. Those -- it's kind of like lightening. They're kind of hard to predict and they do happen from time to time and they will affect coverages because sometimes the impact is -- can be dramatic on a given facility.

Aside from that I think we're looking at stable to slightly improved rates both from a Medicaid and Medicare standpoint. And those should hopefully keep up with sort of the pace of inflation on the expense side. So, overall I think things are pretty neutral. I don't see anything swinging the dial either way at this point.

Okay. Any thoughts on possibility of permanent Doc Fix or anything else that would sort of alter that benign backdrop that you described from a rate standpoint?

Not in the near term. As you know and we have all talked about, there was thought about Doc Fix at the end of last year and that never happened. And now the view is that can gets kicked down the road for a while longer, through this election year at least.

Okay and then maybe two quick ones from me. Just curious. Have you guys talked about previously any -- perhaps the range of coverages in your portfolio and whether there's any kind of transition risk out there that -- on sort of one end of the spe- --on sort of the lower end of the coverage spectrum? And then also just any color on the Medicare percent of your revenue mix ticking up this quarter?

We have a very, very, very small percentage of operators that operate below 1.0 EBITDAR coverage. It's 3.4% of rent. All of those rents are current. All of them have significant credit enhancement and they're long-term relationships with no near-term maturities.

So, in terms of how we think about the bell curve, if you will, of coverages, there's very, very little at the low end. And it's really grouped very tightly in that 1.2 to 1.6 range. That's the color as it relates to how the coverage spreads across the bell curve, if you will.

What was the second piece?

(Inaudible) mix.

Yes, we actually bucked the trend on (inaudible) mix and occupancy. I mean, I think we've seen an industry trend that's gone the other way. Up until -- you know we haven't seen a lot of results from some of our brethren for this past quarter, but we did have a pickup in -- but it could be seasonal. We -- you know, one quarter does not necessarily make a trend. So we'll say -- but obviously it's up.

Okay. Thanks for taking the questions.

Thank you.

The next question is from Rob Mains from Stifel. Please go ahead.

Yes, thanks. Good morning guys. I got disconnected for like a couple of minutes, so I hope that this hasn't already been asked. When you -- Taylor, I want to make sure. You said that you've seen larger deals for SNFs in the 7 cap range?

Yes. The big portfolio trades, they start to trade towards where the public company comps are. I mean, not quite there but they approach them.

Right. (Multiple Speakers) Go ahead.

And you know when we're talking about sizeable deals, we're talking about�

$1 billion deals.

�$1 billion deals, but that's the size of some of these smaller REITs now.

Right. Right. Then I think with last quarter you suggested that $100 million of acquisitions would give you a $0.025 of annual FAD and $0.033 of annual adjusted FFO. Given what's going on with cap rates, are you still comfortable with that, with that comment about the types of deals that you're more likely to do?

That relates to our traditional relationship deals where we're in the nines. And I think that math still holds together more or less. I mean we haven't updated it but it's pretty close. When you think about some of these other real big deals, which, frankly, as we potentially think about them, there has to be a strategic component. Obviously the accretion per $100 million goes down a lot.

Right. And then I appreciate the comment about sort of why you're doing the mortgages now and what the pipeline looks like. Just from the operator point of view, why would I seek REIT financing for a mortgage when there's HUD out there? Is it a matter -- just because HUD dragged its feet forever or is there some other things I'm not thinking of?

Well HUD's difficult in terms of timing and processes, as you know, but also HUD isn't -- you're not going to get 90% loan-to-value generally.

You're going to get your existing debt amount.

Right.

Right.

So you're not going to do a cash-out refinance.

Yes. If you've created equity value for whatever reason from a turnaround or however you've created it, you know, you're going to have limitations in a HUD program that you wouldn't have with Omega.

Got it. Okay. That's all I had. Thank you.

Thanks Rob.

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

Yes, thanks for taking my follow-up. I guess Taylor, a lot of the comments that were made this morning it just kind of seem like there's some pretty strong cap rate compression going on in the SNF space. I'm just kind of curious again -- when you are looking at your acquisition pipeline now, how are you kind of thinking about things? Is it more deals, lower cap rates? Is it a fair amount of deals, selective deals, trying to get better cap rates. Is it less deals because cap rates are too low? How should we kind of just be thinking about what we should be expecting out of OHI over the next 6 to 12 months?

We're going to continue to support our -- our number one priority for allocating capital is our existing tenant base and supporting that tenant base and enhancing that credit. So we're going to continue to do those deals. And as Dan mentioned, they tend to be in the 9s.

And smaller in size of course.

And smaller. And so I think that's our regular pipeline that you've seen for many years. And it's lumpy but we tend to do several hundred million a year in that type of deal. And then when you think about the potential for some of these bigger deals, it really -- it would be a compressed cap rate. From our perspective, there would have to be a strategic component that made sense as we look for the medium and long-term because they aren't going to come with the type of yields that we normally expect in these smaller transactions.

So predicting those is impossible. They're out there. They're somewhat interesting. But, frankly, to say whether that's something we would ever do, I just don't know.

Okay. That's helpful, and then just one more. In Genesis in particular, given it's one of your larger tenants and it's also a public entity, could you just give us some commentary about where things are? What coverage is looking like? You know, a lot of their plans to improve profitability? Whether you are starting to see some of that stuff drop to the bottom line?

Genesis continues to perform. But we don't generally talk about specific tenants and, as you know, we're only a small component of Genesis overall, the overall company. I will say for the most part, the Genesis properties continue to perform well and as they have historically. They have had a couple of facilities out of the 52 that have had some recent issues but they've been rectified. They had to spend some money to get that done. But as we look at Genesis from our credit perspective, those facilities continue to perform well.

Got it. Okay. Very helpful. Thank you.

Thank you.

The next question comes from Nick Yulico from UBS Investment Bank. Please go ahead.

Thanks. Just one follow up. You mentioned a 90% LTV on the loan. What was the cap rate you used to determine the value of the portfolio?

Well, it covers at 1.5, so when you think about --

At 9%.

at 9% so when you think about it it's sort of -- not a 9. So yes, all that math works out to 13%, 14% cap rate. Yes.

I'm sorry. What did you say the cap rate was?

It would be 13% or 14% when you think about 1.5 times coverage on a 9% yield.

Okay. Thanks.

Okay.

(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 today. Bob Stephenson will be available for any follow-up questions you may have.