Omega Healthcare Investors Inc (OHI) 2014 Q4 法說會逐字稿

Good morning and welcome to the Omega Healthcare Investors fourth-quarter 2014 earnings call. (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 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 fourth quarter 2014 earnings conference call.

Adjusted FFO for the fourth quarter is $0.72 per share, which is a $0.01 decrease from third-quarter adjusted FFO of $0.73 per share. As I described in our call last quarter, we anticipated the $0.01 decline in FFO as a result of the $250 million, 4.5% 10-year bond deal that we sold in September with the proceeds used to pay down lower interest rate revolver debt. Adjusted funds available for distribution, FAD, for the quarter is $0.66 per share which is also a $0.01 decrease from third-quarter FAD of $0.67 per share.

We increased our quarterly common dividend to $0.53 per share. This is a 2% increase from last quarter and an 8% increase from the fourth quarter of 2013. We have now increased the dividend 10 consecutive quarters. The dividend payout ratio is 74% of adjusted FFO and 80% of FAD.

Our full-year 2014 FAD was $2.61 per share, at the upper end of our guidance range of $2.58 to $2.61 per share. Our full-year 2014 adjusted FFO was $2.85, at the high end of our guidance range, of $2.82 to $2.85 per share and a 13% increase over 2013 adjusted FFO of $2.53 per share. This is the fifth year in a row that we've grown adjusted FFO by 13% or more.

We have not provided 2015 FAD or FFO guidance, as our projections will depend on the timing of the Aviv merger closing, the pricing of future debt and equities transactions and our view of acquisition pipeline post merger. We will provide 2015 guidance as part of our Aviv closing announcement. In particular, we will provide second-quarter run rate guidance as our first-quarter standalone Omega results will be impacted by our large equity raise earlier in February.

I will add that as of today, we believe that the second quarter FAD run rate on an annualized basis will be within the $2.81 to $2.87 per share range that we provided when we announced the Aviv merger on October 31. The Aviv merger is progressing well. We expect to be sending a proxy statement for stockholders to vote on the transaction in the near future.

Our shareholder meeting is scheduled for March 27 and we expect to complete the merger very early in the second quarter. Our teams are already working together on acquisitions, replacement facilities and portfolio management along with the detailed planning necessary to integrate systems and financial activities.

Lastly, our fourth quarter G&A expense increased by $1.1 million. This is entirely related to costs incurred pursuing new Florida certificates of need with a number of our operators. Our operating partners were successful in receiving 330 of the 2,600 beds granted by the state. We will provide the funding to build and lease the new facilities related to these certificates of need.

Bob will now review our fourth quarter financial results.

Thank you, Taylor and good morning.

Our reportable FFO on a diluted basis was $87.4 million or $0.68 per share for the quarter as compared to $79.9 million or $0.65 per share for the fourth quarter of 2013. Our adjusted FFO was $92.9 million or $0.72 per share for the quarter and excludes the impact of $3.5 million of expense associated with acquisitions and $2 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 $131.3 million versus $111.1 million for the fourth quarter of 2013. The increase was primarily a result of incremental revenue from a combination of new investments completed since the fourth quarter of 2013, capital improvements made to our facilities and lease amendments made during that same time period.

The $131.3 million of revenue for the quarter includes approximately $9.3 million of non-cash revenue. Operating expense for the fourth quarter of 2014 when excluding acquisition related costs, stock-based compensation expense, impairments and provisions for uncollectible accounts receivable was $35.5 million, slightly less than our fourth quarter of 2013. Our G&A was $5.1 million for the quarter with a $1.1 million increase attributable to the Florida CON project Taylor mentioned.

Interest expense for the quarter when excluding non-cash deferred financing cost and refinancing cost was $32 million versus $25.3 million for the same time period in 2013. The $6.7 million increase in interest expense resulted from higher debt balances associated with financings related to new investments completed in late 2013 and 2014.

Turning to the balance sheet for the fourth quarter of 2014. In October, we paid $3.4 million to retire one mortgage loan guaranteed by the Department of Housing and Urban Development. The loan was assumed as part of a 2012 acquisition and had an interest rate of 4.58%. The payoff resulted in a $27,000 net gain and is classified as interest refinancing gain on our income statement.

For the three month period ended December 31, 2014 under our dividend reinvestment and common stock purchase plan, we issued 140,000 shares of common stock, generating gross cash proceeds of approximately $5 million. During the first quarter of 2015, we completed an underwritten public offering of 10.925 million shares of common stock, generating net cash proceeds of approximately $439 million.

Proceeds from this offering will be used to redeem our $200 million 7.5% notes due 2020. We have called the 2020 notes for redemption as of March 13. As a result of the redemption of the 2020 notes, during the first quarter we will record a $4.1 million interest refinancing charge to write off the balance of deferred financing expenses related to the issuance of these notes back in 2010.

We also repaid all of our outstanding borrowings under our revolving credit facility. Today, we have no borrowings outstanding under our credit facility and have $340 million of cash.

In addition, during the first quarter of 2015 we entered into an engagement letter to increase our $1.2 billion revolving credit facility and term limit facility by an additional $550 million. The increase is anticipated to close simultaneously with the closing of the Aviv merger. $300 million of the increase will be in the form of a term loan and $250 million will be added to the revolver.

For the three months ended December 31, 2014, our funded debt to adjusted pro forma annualized EBITDA was 4.7 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 the end of the fourth quarter 2014, Omega had a core asset portfolio of 560 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 third quarter at 1.8 times as of September 30 versus 1.8 times as of June 30, 2014.

Trailing 12 month operator EBITDAR coverage also remained stable at 1.4 times for the third quarter versus 1.4 times as of June 30. We are optimistic that our overall portfolio coverage ratios have stabilized in the near term, having remained effectively flat for the last three quarters.

Turning to new investments, in addition to the aforementioned Aviv announcement, during the fourth quarter of 2014 Omega completed $91.7 million of new investments, primarily consisting of an $84.2 million sale lease-back transaction for four senior housing communities operated by Capital Health Group.

As part of the transaction, Omega acquired title to the four communities and leased them back to CHG pursuant to a 10-year master lease agreement with an initial yield of 6% and annual escalators thereafter of 2.5%. As part of the transaction, Omega will have the option to provide up to an additional $300 million for the development of new senior housing communities.

In addition during the quarter, the Company also invested approximately $7.5 million under its capital renovation and construction program. Subsequent to year end, the Company acquired one facility and funded additional capital expenditures for a total of $12.3 million in new investments. In addition to the previously mentioned Aviv transaction, the Company continues to source new deals at a pace consistent with prior years.

Thanks, Dan. This concludes our prepared comments. We will now open the call for questions.

(Operator Instructions). Our first question will come from Juan Sanabria of Bank of America Merrill Lynch.

Hi, good morning. Thanks. Just a quick question in terms of what you are seeing in the marketplace for skilled nursing acquisitions for cap rates. Could you just give us a sense of the range you are seeing and any increase in the level of competition? I think some of your REIT peers seemingly have gone back to the skilled nursing market, given how tight some of the senior housing and medical office building cap rates have been.

We've talked about cap rates over the last couple quarters and we saw them move in a little bit. But we're seeing relatively stable cap rates the last six months or so with smaller deals still in the 9%s and larger deals, by larger sort of $150 million plus with high 8% type handles. In terms of competition, Dan, do you want to --?

We haven't seen a huge influx. Obviously there's been some larger announced deals by some of the other REITs, but we haven't seen a big influx of additional competition in the market. We're still business as usual, sourcing deals off our existing operator base.

Okay. Just on Aviv, I noticed in their release last night that it seems like their line of credit increased post year-end, but they didn't necessarily reference any material increase in acquisitions. I was hoping you could just give a little color on that.

We can't really give a lot of color on that other than, I will say that their line is used for deals. So to the extent their line moves, it's acquisition driven.

Okay. Then just lastly, I was hoping you could give us a little bit more background on the Florida certificate of occupancies and the background there and the expectations on return. It sounds like you are looking to commit incremental capital.

Yes. Florida opened up certificate of need process probably a year ago. It's been about a year. And it was a very detailed process where they were looking at bed needs in all the various counties and accepted, I believe it was 90 applications, from a variety of operators.

Our goal was to partner with our current operating partners in Florida and look at the counties where we would want to go after CON. So we went after 12 and we got 3. The relative investment is modest and the idea would be new facilities appropriate for their markets. We could potentially put to work probably $30 million to $40 million of capital.

Okay and is that the traditional long-term post-acute or is it the shorter stay rehab type facilities?

The need is going to address more of the shorter stay patient population. That's really what it's defined around. So it would be less traditional, if you will. We have hundreds of facilities like that already in the portfolio.

Great. Thanks, guys. Appreciate the color.

The next question will come from Alan Septimus of Milton Partners.

Thank you. I just wanted to complement management and the Board for running a solid operation and delivering value to shareholders.

Thank you.

And next, we have Kevin Tyler of Green Street Advisors.

Good morning. Your coverages seem stable, but we've heard some grumblings around the industry about increasing Medicare Advantage and Medicare Advantage enrollment and how it's impacting coverages. Are you guys seeing any effect on your business in terms of Medicare Advantage?

We've heard those same grumblings and I'll be honest, we just have not heard that from our operators, not in any material way. It is having modest impact in a few markets, but it's been very small and it has not affected coverage for many of our operators.

Including the big operators. We've really just haven't seen it.

Okay. That's helpful, thanks. Then as you think about the integration upcoming and the Chicago office that you are adding and the Aviv purchase, how can we think about maybe the new culture with that office there and the integration of that office and then the overall external growth trajectory of the new company? Are you able to better capitalize on your cost of capital advantage?

I think so. Culturally, the fit is great. We are already working with the entire team in Chicago on a daily basis. The beauty of that is you have experienced folks in this business are going to dedicate themselves full-time to acquisition and development activity. It's 16 plus people who will be doing that out of the Chicago office, coordinating with the folks here in Hunt Valley. So it will be very additive from our perspective, in terms of our ability to grow the business.

Okay, great. Thanks. The last one I had, just on the senior housing deal in the fourth quarter, I guess I'm thinking about your strategy over the long term. Should we think about this as more of a one-off transaction or are you interested in getting into the senior housing business as a larger portion of your portfolio?

We've talked in the past about putting our toe in the water in the assisted living world, particularly assisted living. This is part of that with a tenant relationship that we've had and it fits our strategy of partnering with a tenant with growth aspirations. What we like is it's growth aspirations through development. Aviv already has a partner like that, Maplewood, who's grown pretty significantly.

Those are the relationships we like. From a strategic perspective we will continue to dedicate all the capital that we can, that's out there, in terms of deals we like in the skilled nursing facility world, but we also believe that our balance sheet's big enough and the pool of talent that we have, particularly with the Aviv folks coming onboard, is broad enough, that we can expand the asset base.

Okay, thanks.

Thank you.

And the next question comes from Chad Vanacore of Stifel.

Good morning.

Good morning.

Just to follow-up on that question about the AL pipeline, maybe you could give us some more color on what that development deal looks like.

Well there is no specific development deals. We have basically provided a level of commitment to them up to $300 million where we will partner on development projects on a go-forward basis. There are, actually, some projects that we are looking at at this time, but it's meant to be for a multitude of projects over the coming years.

Okay. And then in your current pipeline as it stands, should we expect more assisted living deals?

We will continue to look at specific situations with tenant partners. So to the extent, as an example, CHG continues to find opportunities through development, we will expand that. Post the Aviv merger, Maplewood will continue to grow. So it will be driven off of those tenant relationships. If we happen to find other new tenant relationships that have the same model, then yes, we would add them in.

Okay. And then just one last question on the financing end of things. If you had to issue 10-year on your secured today, where would that price, about?

It would be roughly 4 3/8%.

All right. Thanks a lot.

Thanks, Chad.

(Operator Instructions). And our next question comes from Tayo Okusanya of Jefferies.

Hi. This is George on for Tayo. Just in terms of the future debt redemptions and refinancings, would you be looking more so to refi those with debt or do further equity raises?

Right now, given the size of the equity raise we've done, it's likely we would look at the debt market, particularly given what Bob just said in terms of favorable rates.

Okay. And then also just on the senior housing focus, I guess you're more inclined to do development rather than acquisitions? Is that fair to say?

Well we like the new product coming out of the ground in that model, particularly with a well-equitized partner. And in the case of both Maplewood and CHG, that is what we have. So it's not spec development. It's a partner that has a big balance sheet that we can rely on.

So I think it just goes to the product type. We are not interested in buying 30-year-old assisted living product.

But in terms of the acquisition pipeline, the deals that are coming across your table that you are looking at, what portion would you say are senior housing assets?

Very little other than the development projects that we have already talked about. We are really still focused in and looking at skilled nursing.

When you think about the model, our tenants are the source of most of our deal flow. The vast majority of our balance sheet is skilled nursing facility, that's where our deal flow is coming from. To the extent we add a tenant that has assisted living and I mentioned CHG and Maplewood, those are the two big ones, we are going to support them; and if we find another relationship that makes sense then we will support that as well.

Okay. Then just a last one for me, now you guys have had more time to work on Aviv and going through all the assets and everything. Is there anything subsequent to due diligence that you've got that has surprised you or been different than your original underwriting, positively or negatively?

No. We spent a long time in the diligence process and we have not been surprised either way.

Okay. Thanks, guys.

Thank you.

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 Stephenson will be available for any follow-up that you may have.

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