Omega Healthcare Investors Inc (OHI) 2014 Q3 法說會逐字稿

Good morning and welcome to the Omega Healthcare Investors third quarter earnings for 2014 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.

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 statement, 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, Michelle. Good morning and thank you for joining Omega's third quarter 2014 earnings conference call. Adjusted FFO for the third quarter is $0.73 per share, which is a $0.04 increase from second quarter adjusted FFO of $0.69 per share.

Adjusted funds available for distribution, FAD, for the quarter is $0.67 per share, which is also a $0.04 increase from the second quarter FAD of $0.63 per share. The increase in adjusted FFO and FAD is directly related to new investments closed during the second and third quarter.

We increased our quarterly common dividend to $0.52 per share. This is a 2% increase from last quarter and an 8% increase from the second quarter -- from the third quarter 2013. We've now increased the dividend nine consecutive quarters. The dividend payout ratio is 71% of adjusted FFO and 78% of FAD. We've maintained our 2014 FAD guidance range of $2.58 to $2.61 per share and our 2014 adjusted FFO guidance range of $2.82 to $2.85 per share.

We have not included any additional acquisitions in our guidance. We expect that our fourth quarter adjusted FFO and FAD will be approximately $0.01 lower than the third quarter adjusted FFO and FAD as a result of the $250 million 4.5% ten-year bond deal that we sold in September, with the proceeds used to pay down lower interest rate revolver debt. Bob will now review our third quarter financial results.

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $93.9 million, or $0.73 per share for the quarter, as compared to $70.3 million, or $0.59 per share, for the third quarter of 2013.

As Taylor mentioned, our adjusted FFO was $94 million, or $0.73 per share for the quarter, and excludes the impact of a $1.6 million gain related to the early extinguishment of debt, $2 million of non-cash stock-based compensation expense, $585,000 of one-time cash revenue and $259,000 of expense associated with the acquisitions. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter was $130.7 million versus $103.3 million for the third quarter of 2013. The increase was primarily a result of incremental revenue from a combination of new investments completed since the third quarter of 2013, capital improvements made to our facilities and lease amendments made during that same time period.

The $130.7 million of revenue for the quarter excludes -- or, excuse me, includes approximately $9.4 million of non-cash revenue. We expect the non-cash revenue component to be between $8.5 million and $9.5 million per quarter for 2015.

Operating expense for the third quarter of 2014, when excluding acquisition-related cost, stock-based compensation expense, impairments and provisions for uncollectible accounts receivable was $34.1 million, slightly less than our third quarter a year ago.

Our G&A was $4 million for the quarter and in line with prior quarters. We project, for 2014, annual G&A expense to be approximately $16.5 million, assuming no extraordinary transactions or unusual events. As outlined in our press release issued yesterday, during the quarter we recorded a $2.1 million real estate impairment charge to reduce one facility's book value to its estimated sales price.

Interest expense for the quarter, when excluding non-cash deferred financing cost and refinancing cost, was $30.9 million versus $24.5 million for the same period in 2013. The $6.4 million increase in interest expense resulted from higher debt balances associated with financings related to new investments completed in 2013 and 2014.

Turning to the balance sheet. In September we issued and sold 250 million 4.5% senior unsecured notes due 2025. Proceeds from this offering were used to repay outstanding balances under our revolving credit facility. In September, we paid $34 million to retire four mortgage loans guaranteed by the Department of Housing and Urban Development. The loans were assumed as part of a 2012 acquisition and had a blended interest rate of 6.39%.

The payoff resulted in a $1.6 million net gain and is classified as interest refinancing gain on our income statement. For the nine month period ended September 30, 2014 under our equity shelf programs and our dividend reinvestment and common stock purchase plan, we issued a combined 3.8 million shares of our common stock, generating gross cash proceeds of $130 million.

For the three months ended September 30, 2014, our funded debt to adjusted pro forma annualized EBITDA was 4.5 times and our adjusted fixed charge coverage ratio was 3.9 times. I will now turn the call over to Dan.

Thanks, Bob, and good morning, everyone. As of the end of the third quarter of 2014, Omega had a core asset portfolio of 562 facilities with approximately 61,000 operating beds distributed among 50 third party operators located within 37 states.

Trailing 12 month operator EBITDARM remained stable during the second quarter at 1.8 times as of June 30, 2014 versus 1.8 times as of March 31, 2014. Trailing 12 month operator EBITDAR coverage also remained stable at 1.4 times for the second quarter versus 1.4 times as of March 31st.

We continue to be optimistic that our overall portfolio coverage ratios will remain relatively stable over the course of 2014. Turning to new investments. During the third quarter of 2014, Omega completed $32.4 million of new investments, including capital expenditures. The investments involve two separate transactions.

As previously announced 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 Omega. The 125 bed SNF, located in Texas, was combined into an existing master lease with an initial yield of 9.75%.

On July 31st of 2014, Omega purchased one skilled nursing facility from an unrelated third party for approximately $17.3 million and leased it to an existing operator of the Company. The 132 bed skilled nursing facility, located in South Carolina, was combined into an existing master lease with an initial yield of 9.5%.

In addition to the aforementioned transactions, the Company also invested approximately $7 million under its capital renovation program in the third quarter of 2014. Omega continues to see a steady pace of investment opportunities. And, as of today, Omega has a combination of revolver availability in cash totaling approximately $1 billion.

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

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question is from Nick Yulico from UBS. Please go ahead.

Oh, thanks. Good morning, everyone. I was hoping you can just give a little bit of an update on the acquisition pipeline as you see it today. Third quarter looked like a little slower quarter.

What does it look like right now, as far as larger portfolios out there available for sale? I think there's one that's at least in the $300 million-range. What do you think seeing on cap rates for those acquisitions as well?

Our pipeline remains robust, as I indicated. Our acquisition history has always been -- and remains -- choppy. It just depends on it goes quarter-to-quarter. We're still looking at a lot of deals. There's still a lot of deals out in the market. Cap rates have come in a little bit. We're still seeing sort of smaller portfolio deals where we slip into existing relationships with cap rates in the 9s.

You've got some slightly larger deals out in the market -- what I'm call medium-sized deals in the couple, $300 million, $400 million range. I those are probably looking -- you're looking at something in the 8s in terms of cap rates.

I don't know of any but -- the large portfolio deals. We saw one last quarter, the giant portfolio deals. I think they're being underwritten in the 7s. So that's kind of where we stand with our pipeline and where we see cap rates as of today.

And you mentioned -- I think you said a couple medium-sized deals that are being shopped right now in the market that could possibly close over the next couple of quarters if you chose to purchase them?

We know of a couple. I'm not sure that I would say [they were] shopped.

Okay. And then going back to this question of EBITDAR coverage. And I was wondering if you've ever done the math or maybe you could help us out here to think about what the true coverage for tenants, your tenants, are after you factor in any sort of CapEx obligation that they have under their leases or the amount of money they might be funding into your facilities. And then also any light you might be able to shed on the leverage profile of your tenant base as well.

In terms of CapEx, it's typically basis points. So when you think about a coverage of 1.4, if you factor in CapEx spend, it's 0.05 so 1.35. At the most it's 0.1 so 1.3. And, obviously, CapEx varies depending on the vintage of the facility. In terms of tenant leverage --

Can I just pause right there? Because a lot of our tenants, as a matter of fact most of our tenants -- CapEx runs through their P&L. I mean, I don't want to -- it's expensed. It's not true CapEx.

So a lot of that, what you call, what we call CapEx, and what you think of as CapEx, is already factored into the numbers. So to hit it with another 0.05] or 0.1 is probably a little bit conservative -- yes, conservative.

Yes.

I'm sorry.

Now, in terms of the leverage profile, most of the regional operators that we do business with don't have debt outside of their lease obligations other than AR-type debt, which is, typically, advance rates are what, Dan, 60%?

65% to 75%.

So there's really no incremental leverage other than the leverage that they would put on AR assets and that's pretty much universal. The only big public tenant we have -- or will be public -- is Genesis.

Okay. And then just, lastly, a couple of -- just other questions here is on the assets held for sale on the balance sheet. Could you just tell us how many assets and beds are those?

We have one facility held for sale and one parcel of land held for sale. And you say it's roughly $6.6 million combined. And we did not sell anything in the quarter. The one little $20,000 charge was for expenses coming through from a prior sale in the second quarter.

And then what was the -- and then the asset that got closed, I guess, and was impaired. You had one this quarter and I think you had one in the second quarter as well. What's going on with those assets?

We just had two facilities with the same operator in the exact same market. The market really didn't support two facilities. They closed one, moved the residents over to the other. Our rent was not reduced. The facility was antiquated. It'll be sold for the land value. It made sense from our operator's perspective. We opined and once, again, the rent didn't change.

Part of a mass release.

Okay, got it. Thanks, guys.

Thank you.

Our next question is Andrew Rosivach, Goldman Sachs. Please go ahead.

Hey, good morning, guys. I know you've flagged this before but maybe you could talk about -- you've got an amazing amount of debt coming -- excuse me -- prepayable next year. You've got the $200 million of 7.5%s and you have the $575 million that's coming due in October.

If maybe you could give an idea of -- I know you need to be in the window. But if those are refi opportunities, if funding costs stay where they are -- and maybe how far funding costs could potentially move before it still wouldn't make sense to take them out.

Sure. If the curve -- well, just to recap what you said. We've got $200 million of 7.5% bonds that are callable February 2015 and $575 million of 6.75% bonds that are callable in October of 2015. And these are call features on bonds that mature in 2020 and 2022 so we have a lot of flexibility as to when we do whatever we elect to do.

But if the yield curve holds and the markets are available, you're looking at refinancing both of those with something with a 4 handle, 4.5%, 4.75%.

So we look at a range of opportunity there even if the rates move into the low 5%s of somewhere between $16 million and $20 million of interest expense pickup. Of course, it's run rate based so it's all going to depend on timing. But if the yield curve holds that's the run rate basis once those refis happen.

Terrific. That math's a lot of help. Thanks.

Okay.

Our next question is Michael Knott, Green Street Advisors. Please go ahead.

Yes, hi. This is Kevin Tyler in for Michael Knott. I just wanted to follow up on Nick's question. You said cap rates generally have come down and we've seen that across the healthcare sector with NAV premiums generally shrinking pretty quickly.

But you guys still garner a substantial premium and I was curious your thoughts, as cap rates move down, how you think about acquisitions going forward? And do you have any concern that your pricing power might evaporate?

Well, the trend has been -- the cap rates that Dan talked about, we've seen the last six months or so. We haven't seen any further push. And so we think the market's settled where it is. And you still have a very fragmented industry with ongoing consolidation, and, really, the ability to take advantage of those opportunities leveraged into our multi-tenant model.

So, our view is, those one, two, three, four facility deals that price in the 9s will continue to be available. And the bigger portfolios are going to get a little bit more of a premium, in terms of cap rates. But, given our cost of ten year bond debt at 4.5%, it's still very attractive from a spread basis.

Okay, thanks. And then in terms of the competitive environment, generally, have you guys seen a lot of other investor types interested, that haven't typically been around in the skilled nursing space in the past, to those looking for purely yield?

We really haven't seen other investors in direct competition for skilled nursing facility assets. We continue to see peer competitors and non-traded REIT competitors but -- and Dan maybe you can add to that but I'm not aware of anybody new.

No, the arena has sort of stayed the same for the last 12 months.

Okay, great. That's helpful. And then just shifting gears a little bit. There's been a lot of curiosity in the marketplace and at NIC around the post acute model after the recent HCN deal.

But can you elaborate a little bit on your portfolio in terms of mix versus post acute versus long term care and maybe how you think about the post acute model going forward and the shorter stay beds?

Well, I think there -- we've seen more specialty build activity focused on pure post acute in certain markets that have enough depth to handle it. And so I think we'll continue to see some component of that market in -- or some component of that model in certain markets.

But, frankly, I think the traditional model where you have a major part of the building serving long term care-type stay patients, Medicaid patients with 20, 30 Medicare residents, that model's going to continue to be the principal model in our business.

Okay. Great. And then the last one for me. If you can elaborate a little bit on your specialty hospital portfolio and maybe just plans for that moving forward. I know it's not a large piece of your business but was curious where you see that in maybe a year from now.

I don't see it changing at all. Typically -- not typically -- those specialty hospitals are part of larger mass release relationships. We built one a number of years ago in the Ohio market. We've acquired others as part of bigger transactions.

And, typically, they just fit into the market that our existing skilled nursing facility operator is running. There's some referrals, cross referrals. But it's really not a key component to our ongoing model.

And they're usually on the same campus or even connected to an adjacent skilled nursing facility.

Okay. Thanks for the time today.

Thank you.

Our next question is Chad Vanacore from Stifel. Please go ahead.

Hey good morning.

Good morning.

Looks like that South Carolina SNF that you bought on a per bed basis you spent a premium price on it. Can you give us a little detail about what warranted it? Was it better payer mix or the age of the asset?

No. Maybe I should have gone into a little bit more detail. There was -- there was one building that closed in the quarter. But it actually was part of a three facility deal. The other two facilities closed in the previous quarter. It was bifurcated because of the payoff of some debt.

So we pushed a lot of the proceeds to the facility that had a later close. So it looked a little bit different. It wasn't as high per bed as it might have looked. It -- the overall deal penciled out to 109 per bed, which, in South Carolina, is not unusual.

Whereas, I know it looked liked it was much higher than that for the single facility. But it really was part of a three facility acquisition.

All right. And then on the couple of deals you did this quarter, what kind of escalators do you put into the contracts?

2.5%.

All right. And that's all I need. Thanks.

Thanks, Chad.

Our next question is George Hoglund, Jefferies. Please go ahead.

Yes. Hi, guys. Just a couple of questions. I'm just wondering what your outlook is on census going forward given the observation days rule.

We've seen some movement in census but, for the most part, our operators have pointed to just normal cyclicality. Not so much the three day rule. I'm sure that's been a culprit to some degree but our census has actually come up.

We point to the cyclical nature of our business. So, at this point, I don't have any specific comments on what, if any effect, it's having on our overall census or what it will have in the future. It's modest, is the word I'm hearing.

Okay. And then just going back to the potential refinancings in 2015, what's your willingness to potentially do a bond deal early and take some dilution just to lock in a rate?

We have no sense that the yield curve is just going to spike away from us. But I think your question is fair. And it's just going to be market conditions at the time and our windows, in terms of being able to access the capital markets. So I wouldn't necessarily rule it out but I think we'd have to just look at the circumstances at the time we were thinking about the market.

Okay. And then just my last one. What's the outlook for potential facility closings or other sales of troubled facilities?

There are none on our radar screen at this point. We do have lightning strike from time to time but there's really -- maybe there's one out there. But there are no material asset closings that we see in the near future.

And just -- nothing that's going to affect our rent -- our rent streams.

Okay. All right. Thanks, guys.

Thank you.

(Operator Instructions). Having no questions, 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 our call today. Bob will be available for any follow-up questions you may have.

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