Omega Healthcare Investors Inc (OHI) 2015 Q1 法說會逐字稿

Good day, and welcome to the Omega Healthcare first quarter earnings call for 2015. 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 call over to Ms. Michelle Reiber. Ms. Reiber, the floor is yours, ma'am.

Thank you and good morning. With me are Omega CEO, Taylor Pickett, CFO, Bob Stephenson, COO, Dan Booth, and our Chief Corporate Development Officer, Steven Insoft. Comments made during this conference call that are not historical facts may be forward-looking statements, such as statements regarding our financial projections, dividend policy, portfolio restructuring, 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. Place 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 we refer to some non-GAAP financial measures, such as FFO, adjusted FFO, FAD, and EBITDA. Reconciliations of the 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 first quarter 2015 earnings conference call. Adjusted FFO for the first quarter is $0.71 per share. Adjusted funds available for distribution, FAD for the quarter is $0.65 per share. We increased our quarterly common dividend to $0.54 per share, this is a 2% increase from the last quarter, and an 8% increase from the first quarter 2014. We have now increased the dividend 11 consecutive quarters. On April 15, we press released our 2015 annual guidance. We broke this guidance down by quarter, and compared the guidance to our actual 2014 quarterly results.

It is important to analyze guidance on a quarterly basis, because our first quarter results were diluted by our mid-February $459 million equity offering, and to a lesser extent our early March $690 million bond offering. If we compare the midpoint of our fourth quarter 2015 guidance to fourth quarter 2014 actual results, both adjusted funds from operations and FAD are approximately 10% higher in 2015. Our growth over the next few quarters and into 2016 will be fueled principally by acquisitions.

Our pipeline continues to be active. The Aviv merger closed on April 1. We will begin reporting the combined company tenet and other information in the second quarter. The integration of the of the companies has proceeded as planned, with the all of the Company financial and tenet data analysis migrating to Hunt Valley. Our Chicago team is focused on new acquisitions, capital improvements to our existing real estate, and new construction projects. Bob will now review our first quarter financial results.

Thank you Taylor, and good morning. Our reportable FFO on a diluted basis was $79.7 million, or $0.59 per share for the quarter, as compared to $84.4 million, or $0.68 per share for the first quarter of 2014. Our adjusted FFO was $95.5 million, or $0.71 per share for the quarter, and excludes the impact of $9.4 million of interest refinance expenses, $4.9 million of expenses associated with acquisitions, and $1.6 million of noncash stock based compensation expense. Further information regarding the calculation of FFO and adjusted FFO is included in our earnings release and on our website.

Operating revenue for the quarter was $133.4 million, versus $121 million for the first quarter of 2014. The increase was primarily a result of incremental revenue from a combination of new investments completed since the first quarter of 2014, capital improvements made to our facilities and lease amendments made during that same time period. The $133.4 million of revenue for the quarter includes approximately $9.4 million of noncash revenue. Operating expense for the first quarter of 2015, when excluding acquisition related costs, stock based compensation expense, impairments and provisions for uncollectible Accounts Receivable, was $35 million, and slightly less than our first quarter of 2014. Our G&A was $4.4 million for the quarter. And we project our 2015 annual G&A expense will be between $26 million to $27 million, with the growth primarily related to the Aviv merger, and the completion of new investments.

In addition, we expect our 2015 annual noncash stock based compensation expense to be approximately $10 million. Interest expense for the quarter when excluding noncash deferred financing costs and refinancing costs were $32.4 million, versus $27.1 million for the same period in 2014. The $5.3 million increase in interest expense resulted from higher debt balances associated with financings related to our 2014 investments, and 2015 financings that positioned Omega to refinance Aviv's debt on April 1.

Turning to the balance sheet for 2015, in February we completed an underwritten public offering of 10.925 million shares of common stock at $42 per share, generating net proceeds of approximately $439 million. The proceeds were used to redeem our $200 million 7.5% senior notes due 2020, in connection with the redemption during the first quarter of 2015 we recorded approximately $11.7 million of costs and expenses that are classified as interest refinancing expenses on our income statement.

In March we issued $700 million 4.5% senior unsecured notes due 2027. Proceeds from this offering were used to repay the outstanding balances under our credit facility, to prefinance the payoff of Aviv debt, and to repay $147 million to retire 21 mortgage loans guaranteed by HUD, which had a blended interest rate of 5.33%. The payoff of the HUD debt resulted in a $2.3 million net gain for the early extinguishment of debt, and is also classified under interest refinancings expense on our income statement. For the three month period ended March 31, 2015 our dividend reinvestment and common stock purchase plan, we issued 135,000 shares of common stock, generating gross cash proceeds of over $5 million. As outlined in the press release issued yesterday on April 1 we completed the Aviv merger and repaid all of Aviv's outstanding unsecured debt in addition we assumed $100 million of secured 4% debt. Today, we have $3.4 billion of funded debt on our balance sheet, which includes $265 million of borrowings under our credit facility, in addition we have $28 million of cash. For the three months ended March 31, 2015, our funded net debt to adjusted proforma annualized EBITDA was 3.7 times, and our 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 first quarter of 2015, 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. Most of the Aviv merger, Omega's core portfolio, has grown to 908 facilities with approximately 91,000 beds, distributed among 81 third-party operators, located in 41 states. Trailing 12-month operator EBITDARM for the Omega portfolio remains stable during the fourth quarter at 1.8 times as of December 31, 2014, versus 1.8 times as of September 30, 2014. Trailing 12-month operator EBITDAR coverage also remains stable at 1.4 times for the fourth quarter, versus 1.4 times as of September 30.

We are currently in the process of incorporating historical operating results for all of the former Aviv facilities on a consistent basis with Omega's reporting and tracking systems. Beginning with our second quarter earnings results we will report operator coverages for the combined Omega Aviv portfolio for the trailing 12-onth period ended March 31, 2015.

Turning to new investments. During the first quarter of 2015, Omega completed $21.3 million of new investments, which included a $6.3 million sale leaseback transaction for one skilled nursing facility operated by a current Omega operator. The Company also invested approximately $15 million under its capital renovation and construction programs in the first quarter of 2015.

Additionally, Omega is in the process of closing an approximately $175 million sale leaseback transaction for 23 care homes located in the United Kingdom, and operated by Healthcare Homes Holding Limited. As part of the transaction, Omega will acquire title to the 23 care homes and lease them back to healthcare homes, pursuant to a 12-year master lease, with an initial cash yield of 7%, and annual escalators of 2.5%. This is Omega's first foray into the UK in many years, and were precipitated primarily by the strength of Healthcare Home's management team, led by Graham Lomer and David Bates. We believe Healthcare Homes will provide an excellent platform for future growth, in terms of both new acquisitions and capital expenditures.

Turning to our current pipeline, as a result of the Aviv merger Omega now has acquisition and development teams in both Chicago and Hunt Valley, Maryland. Both teams will continue to source transaction from our existing operator base, while opportunistically seeking to broaden upon our already diverse group of professional regional operators. Our current pipeline remains robust, as our exiting portfolio of operators remain actively acquisitive, in terms of both new investment opportunities and capital expenditure projects.

Thank you Dan. That concludes our prepared comments, we will now open the call for questions.

Thank you, sir. We will now begin the question and answer session. (Operator Instructions). At this time we will just pause momentarily to assemble our roster. The first question we have from Nick Yulico of UBS. Please go ahead.

Thanks. Sorry, can you just go over again the UK acquisition? What was the dollar amount and cash yield on that?

Sure. First off I just want to point out it is not closed. It is imminent. We expect it to close either the end of this week or early next woke. It is approximately $175 million, and the initial cash yield is 7%. It is predominantly private pay. It is really assisted living for the most part.

Okay. And then are you guys going to file a supplemental?I didn't see one yet.

It will be filed today.

Okay. And then is that going to have, I mean are you guys going to have some sort of pro forma balance sheet information after the merger close? I know you gave what the debt was on the balance sheet, but are you guys going to give any more info on that?

It will not the have that in there at this tile, Nick. We are going through purchase accounting as we speak, which is a very complicated process, and of course first we have to close the Aviv books, get a beginning balance sheet, so it will not today have that in there.

Okay. And then I guess the other question was on you had the situation where the private equity sponsor of Aviv sold their stock after the merger. Have you got any sense for the remaining, for the OP unit holders in Aviv, which is I guess mostly the family founders of Aviv? Any conversations with them about what their plans for holding your stock versus Aviv's?

We are not aware of anybody who has talked about exiting. So we haven't heard anything.

Okay. Thanks.

The next question we have comes from Juan Sanabria, Bank of America.

Hi, good morning. Could you just speak a little bit more about the UK opportunities, and how we should be thinking about it?I mean are you targeting over time a certain percentage of your portfolio that you would like overseas? And in the UK, would you look to be more private pay? And in any way does that speak to sort of a more limited opportunity set in the US? Just seems like a curious initial foray not being in the traditional skilled nursing set where you focused in the US, and how you have talked about having a robust pipeline here. Just curious about the rational, and also how you are hedging that, or looking to hedge that over time?

The foray into the UK began about a year ago, when it was marketed through KPMG Marwin, and our view was that we would go into the UK with the right operator relationship, which we found a management team that is excellent, and will be acquisitive, so we will lever into them just like we have with our tenant base here. We have talked in the past about assisted living. We do have assisted living platforms via the Aviv transaction, and the transaction we did in the end of the fourth quarter. So for us, it really is just a natural expansion of the model that we have run for a long time, which is to find the operators that you can grow with, that are quality operators and the opportunity to go to the UK just presented itself. It is great from our perspective.

Did you talk about the rent coverage there at all?

We didn't. But it is in line with what we look at when we look at our portfolios here in the north of 1 to 1. I'm sorry, 1.1 to 1.

Great. Thanks. And then on the balance sheet, if I could just ask what the thought process is longer term on I think it is $500 million of term loans, how should we be thinking about that over the balance of the year, in terms of what is incorporated into guidance, and then maybe beyond that, any thoughts about terming out that debt?

No, that will stay in place throughout the year, the term loan. And our financial policy hasn't changed. We will use the credit facility to lever up, and then we will put permanent financing in place, as well as use the ATM.

Okay. And just kind of one quick question with regards to just the level of competition. Have you guys seen any greater competition in the US for skilled nursing assets? Have you seen the new Ventas spinco in the market? Any thoughts would be helpful, and any views on where you think cap rates are for the balance of 2015 for your pipeline?

We really haven seen a change in terms of competition for assets. And the interesting thing, I think to think about with spinco, or Care Capital Trust, I believe is what they named it, is like similar to our portfolio, a lot of our activity comes through our tenant base, and we have a few overlapping tenants, but not like an enormous number. So I would expect that their model is going to be similar to ours, where a lot of activity comes throughout the existing tenant base. Of course, in a big marketed transaction we would run into them. But not unlike pre our merger, it was Omega, Aviv, and the private guys. In terms of cap rates, we are still looking at smaller deals in the 9s for skilled nursing facilities, and larger deals in the high-8s in terms of yields.

Great, thank you.

Thank you.

Next Chad Vanacore of Stifel.

Give us an idea of the size of your pipeline, and what kind of assets are in there?Whether these are larger deals, and how much senior housing versus skilled nursing you are looking at right now?

I mean the pipeline is sizeable. When we talk about the pipeline it is really just everything that is on our plate that we are looking at. We don't really separate by what we have term sheets signed on, and what we are in the process of doing purchase and sale agreements on. So our universe of what we are looking at is in excess of $1 billion. For the most part it is sourcing off of our existing tenants on the skilled nursing side. There are, however, some assisted living assets and there are a number of assisted living development transactions that we are looking at as well. I mean I don't off top of my head have a good percentage breakdown. It is heavily weighted towards the SNF sector. But there is a fair amount of ALFs, particularly as it is relates to development projects.

Okay. Because it seems like you have been more amenable to doing more senior housing on the assisted living side. All right. And then can you give us an average cost of debt on the current outstanding debt?Bob, you still there?

No, I think it is --The average cost is under 5.

Got you.

Just under 5.

All right. That is it for me. Thanks.

Thanks, Chad.

Kevin Tyler, Green Street Advisors.

Good morning. Aviv's revenue that was covered last quarter less than 1 time, so I think it jumped to about 23%. Are you expecting any change as you integrate or incorporate Aviv's facility this quarter to your 1.4 times coverage?

Not as we sit here today. As you remember, the Aviv coverage has historically been the same as Omega's. So as we sit here today, and again we are working through our process, I would expect that it is going to be fairly consistent.

Okay. And anything since specifically that you could point to, or Aviv could point to that explains the jump last quarter? The 23%?

A large percentage of that was driven by two situations. One where we had an operator who literally went from about 1.01 times to 0.99 times. So it just fell into a different cohort for a couple of basis points, and the other half of it was by and large an operator we have been buying value-add opportunities with, where their coverages were going down, but not because of deteriorating operations, but because we were adding value-add acquisition turnarounds.

That is very helpful, thank you. The last one for me, going back to the external growth that you are forecasting. I think you said about $650 million. Two things. One is that $175 million in the UK in there, and then if you aggregate the $650 million, and you compare it to last year for Omega alone, excluding Aviv,it slightly exceeds that run rate, but when you lump Aviv into it you get to a lower number. And I guess he was just curious why that number has come down? Is it a function of a more challenging environment, or the fact that you guys have had an acquisition on your plate now for the first quarter of the year?

I think there is an element of just general conservatism. If you look back, we never have given guidance as a relates to acquisitions, because they are so choppy you just don't know. But as part of the merger we put out guidance in our pro forma of $650 million, and we reiterated our confidence with respect to that in our guidance going forward for the year. So I would just say it is conservative relative to the pipeline today but again, deals are choppy, and we can't predict the timing.

Thanks guys.

Tayo Okusanya of Jefferies.

This is George on for Tayo. The lack of deals in 1Q would you attribute that to just choppiness of deals, or just more effort being focus on closing the Aviv acquisition?

I would say principally choppiness. Everyone in the room was still active creating the pipeline that as an example the UK transaction. I think principally choppiness, but I will add now that the merger is complete, Steven Insoft and the team in Chicago is able to focus almost exclusively on acquisitions and development, where there was other activity that they were involved in previously. I want to make one other little follow-up to Kevin's question. The $175 million for the UK deal is part of our $650 million in guidance.

Okay. And then just one more. On the CMS proposal for a 1.4% increase for SNFs, is that sort of in line with what you guys were expecting, and what do you think the impact on the operators will be?

It is in line with what we are expecting and I think that really just offsets normal inflation that they are going to experience. So from a coverage perspective, you wouldn't expect any change in coverage from that rate change.

Okay. Thanks, guys.

Thank you.

(Operator Instructions). Next we have Todd Stender of Wells Fargo. Please go ahead.

Hi. Thanks guys. Can you talk about the economics around the new SNFs you are going to build in Florida that is going to replace the other three?See if you are assuming that you are going to sell those, and really how fungible are those without a tenant?

They are going to be closed down and the licenses from those three facilities will actually be moved over to the new building, so they will not be sold as active operating SNFs, and they won't have a license so they will be really just sold as vacant facilities for whatever use they might provide. We wouldn't expect to get any material proceeds from those. However, the rent associated with these three buildings will not go away. The rent for the new building will be additive to the old rent, so there is no rent going away.

Is there a going in yield you are assuming for that development?

I think it is 8.5 going in.

And how about the coverages on those three assets, what will that go from, and what will that go to?

The coverages on those three assets are not bad today. This are pretty good. They are part of a bigger master lease, so we sort of look at the overall. What we have is that, we have got three facilities that are just physically obsolete. In markets that are not that, that are declining. So this is just an opportunity that we saw, and the operator saw to do a new build in a better market with a new state-of-the-art building.

I think the answer is, you are going to have increased rent for the incremental dollars spent to build the building, and then the coverages from the three buildings are going to be comparable to the new build.

Great.

So no diminution in coverage. Economics on the incremental dollars being spent to develop the property at an 8.5% yield.

That is helpful. Finally post-Aviv closing just as a reminder, what does your operator concentration look like for the Top 3 tenants? As of the March 31st, they represent about 30% investment, what does that go to?

It goes to around 20%. 20% to 22%, in that range. So the top three in and the way I always sort of thought about them, they are all 10% or below. We have diluted it down to where we are not talking about any operators above 10%.

Okay. Thank you.

Next we have a follow-up from Juan Sanabria, Bank of America.

Hi, thanks guys for taking the extra time. Just a quick question with regards to a theoretical kind of question here. If you guys underwrite something, and then find there may be some improper billing by the operator, whether it be for too high a therapy, or what have you, would you guys have any recourse to the seller or the operator for underwriting numbers that may have not been representative of what should have been the case?

Sure, to the extent that you have reps and warranties and purchase and sale agreements, you are going to have recourse for sure. I'm not exactly, it varies. The survivability of those reps and warranties varies. If they get picked up 10 years down the road, probably not. If it is something that becomes apparent soon, then you would have recourse. We have not had that situation arise.

And just on that same topic, do you guys know any investigations that may be happening with any of your operators obviously seeing the issues at Manor Care?

No.

Okay. And just I think to reiterate one of the points earlier, I think it would be helpful just to have the supplemental released the night of earnings just for our sake, just to help us go through the numbers, et cetera. So maybe something we could have next time if possible? That is it for me. Thank you.

Okay.

At this time we have no further questions. We will go ahead and conclude our question and answer session. I would now like to turn the conference back over to Mr. Taylor Pickett for any closing remarks. Sir.

Thank you for joining our first quarter conference call. Bob Stephenson will be available for any follow-up questions you may have.

We thank you, sir, and to the rest of the management team for your time. The conference call has now concluded. At this time you may disconnect your lines. Thank you, and have a great day everyone.