Omega Healthcare Investors Inc (OHI) 2015 Q3 法說會逐字稿

Good day and welcome to the Omega Healthcare third-quarter 2015 earnings call and webcast.

(Operator instructions)

Please note this event is being recorded. I would now like to turn the conference over to Ms. Michelle Reiber. Please go ahead.

Thank you and good morning. With me today are Omega's CEO, Taylor Pickett, CFO, Bob Stevenson, COO, Dan Booth, and our Chief Corporate Development Officer, Steven Insoft.

Comments made during this conference 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. Please see our press releases in our filings with the Securities and Exchange Commission, including without limitation, our most recent report on form 10-K which identifies specific factors which 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 EBIDTA. 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 think you for joining Omega's third-quarter 2015 earnings conference call. Adjusted FFO for the third quarter is $0.79 per share. Adjusted funds available for distribution, FAD, for the quarter is $0.72 per share.

We increased our quarterly common dividend rate to $0.56 per share. This is a 2% increase from the last quarter and an 8% increase from the third quarter 2014. We've now increased the dividend 13 consecutive quarters. Based on actual results through September, we've increased our 2015 adjusted FFO guidance upward to $3.06 to $3.07 per share. In addition, we've narrowed the 2015 FAD guidance range to $2.78 to $2.79 per share.

Turning to the deal environment, we've seen a handful of large transactions priced in the 7% yield range. While we have a couple of midsized pipeline transactions that were priced in the mid 8% yield range, our deal pricing for new transactions is likely to be higher. Smaller skilled nursing facility transitions will likely price in the 9%s, with midsize deals in the high 8%s. On the assisted living facility side, we will generally price transactions at 7.5% and higher. These pricing changes reflect our increased cost of both debt and equity capital. At this point, it is unclear what, if any, impact this will have on our acquisition volumes in 2016.

I will add that we continue to grow our capital expenditure in construction in progress commitments and we will continue to manage our balance sheet conservatively so that we are always in position to meet our tenant partners' capital needs. Bob will now review our third-quarter financial results.

Thank you, Taylor, and good morning. Our reportable FFO on a dilutive basis was $147.5 million, or $0.76 per share for the quarter as compared to $93.9 million, or $0.73 per share, for the third quarter of 2014. Our adjusted FFO was $154.4 million, or $0.79 per share, for the quarter and excludes the impact of $3.6 million of expenses associated with acquisitions, $2.2 million of non-cash stock-based compensation expense, $863,000 of interest carry and a $301,000 provision for uncollectible accounts receivable.

Operating revenue for the quarter was $202 million versus $130.7 million for the third quarter of 2014. The increase was primarily a result of incremental revenue from a combination of the Aviv acquisition and other new investments completed since the third-quarter of 2014, capital improvements made to our facilities and lease amendments made during that same time period. The $202 million of revenue for the quarter includes approximately $14.9 million of non-cash revenue. Operating expense for the third quarter of 2015, when excluding acquisition and merger-related cost, stock-based compensation expense, impairments and provisions for uncollectible accounts receivable, was $34 million greater than our third quarter of 2014 due to the Aviv merger and other acquisitions.

Our G&A was $8 million for the quarter and we project our quarterly G&A expense will be between $7.5 million to $8 million for the quarter with the growth over 2014 related to the Aviv merger and the completion of new investments. In addition, we expect our non-cash stock-based expense to be between $3 million to $3.5 million for the quarter.

Interest expense for the quarter, when excluding non-cash deferred financing costs and refinancing cost, was $38.2 million versus $31.9 million for the same period in 2014. The $6.3 million increase in interest expense resulted from higher debt balances associated with financings related to our 2014 and 2015 investments, including the Aviv acquisition which occurred on April 1, 2015.

Turning to the balance sheet for the quarter, in September we issued $600 million, 5.25% senior unsecured notes due 2026. Proceeds from this offering were used to call for redemption our $575 million, 6.75% senior notes due 2022.

On September 25, we deposited approximately $615 million with a trustee of the 2022 notes. This amount included a redemption premium of 3.375%, semi-annual interest and additional accrued interest to the redemption date which occurred on October 26. The $615 million was classified as other assets on our September balance sheet. The Company had adjusted FFO, or added back eight days of interest at 6.75% resulting in the requirement to deposit with the trustee the principal balance in September.

In addition, during the first nine months of 2015, under our dividend reinvestment and common stock purchase plan, we issued 1.8 million shares of common stock, generating gross cash proceeds of $66 million. In the fourth quarter of 2015, we have issued approximately $75 million of gross equity under our dividend reinvestment of common stock purchase plan and ATM programs. For the three months ended December 30, 2015, our funded debt to adjusted per forma annualized EBIDTA was 4.7 times. Our adjusted cash fixed-charge coverage ratio was also 4.7 times.

I'll now turn the call over to Dan.

Thanks, Bob, and good morning everyone. As of the in the third quarter of 2015, Omega had a core asset portfolio of 932 facilities, with approximately 93,000 operating beds distributed among 83 third-party operators, located within 41 states and the United Kingdom. Trailing 12 month operator EBITDARM for our portfolio remained stable during the second quarter at 1.8 times as of June 30, versus 1.8 times as of March 31, 2015. Correspondingly, trailing 12 month operating EBITDAR coverage also remained stable at 1.4 times as of June 30 versus 1.4 times as of March 31.

Turning to new investments, during the third quarter ended September 30, Omega successfully consummated $216 million of new investments including capital expenditures. As previously reported in our June 10-Q and our second-quarter earnings discussion, we completed five separate transactions of $184 million. Subsequently in September 2015, Omega closed on a $32 million sale lease back on two skilled facilities in Florida with 260 operating beds. The facilities were added to an existing master lease with a current operator in bared an initial cash yield of 9%.

Not including the Aviv merger, Omega has closed on $468 million of new investments and capital expenditure projects for the nine months ended September 30. As previously stated, we have a strong pipeline and are still on track to meet our previous acquisition target of $650 million for the year. That being said, timing is not always predictable and certain transactions in our pipeline that we have a high level of confidence in closing could slip to the first quarter of 2016 as we await certain regulatory approvals.

In addition to an active pipeline, we continue to invest capital in both major renovation projects and new development projects with our existing operators. As of today, Omega currently has approximately $550 million for the development of new SNFs and ALFs and reinvest in our existing portfolio. These projects, taken as a whole, have approximately $230 million remaining under these various commitments. As of today, Omega currently has approximately $830 million of cash and availability to fund new investments. I will now turn the call over to Steven to discuss our assisted living memory care strategy.

Thanks, Dan. Thanks everyone for joining today. Consistent with our call last quarter, senior housing remains the targeted portion of our investment focus. We're focusing on regionally-based operators who have a track record of successful execution and value add ALF and dedicated Alzheimer acquisitions and targeted new construction. This limited focus approach allows us to achieve stronger yields in higher end, private pay, ALF and dementia related assets.

In that vein, in the third quarter we closed our first investment with Atlanta-based Phoenix Senior Living. The Phoenix acquisition had a starting yield of 7%, rising to 8% in the second lease year with 2.5% annual escalators thereafter. Our two Atlanta area acquisitions with Phoenix were purchased below replacement cost and meaningfully through fill up at the time of investment. We're also investing in a 48-unit dedicated Alzheimer's facility in Baton Rouge, Louisiana with Phoenix. The investment is being funded as a construction loan with an 8.75% yield. The agreement provides us a purchase option as we intend to add it to our master lease upon stabilization.

While we pursue these opportunities and work with other senior housing operators that fit our target profile, we remain mindful of the development cycle and are limiting our new construction focus to supply constrained markets. Furthermore, our senior housing investments remain roughly 10% of our asset base and are all subject to triple-met master leases. We have no RIDEA structures in our portfolio at this time.

Our ability to find these talented regionally focused operators leverages our broader market coverage approach that we've employed over the years in attracting high-quality SNF operators into our portfolio. While we remain very much a SNF focused REIT, Phoenix is an example of our how emerging senior housing strategy allows us to leverage our SNF marketing approach.

Thank you, Stephan. That concludes our prepared comments. We will now take questions.

We will now begin the question-and-answer session.

(Operator instructions)

Juan Sanabria, Bank of America.

Taylor, I was going back to your initial comments about cap rates. Those new numbers you gave, are those the new market numbers you're seeing out there for current transactions or what your cost of capital will allow you to pay? And are you seeing any increased competition from other sources?

We're not seeing increased competition to the extent that we're sourcing through our large network. In terms of cap rates, I think you'll still see deals, at least for some period of time, get done at lower cap rates. We've seen non-traded REITs dip down into the 7%s and low 8%s and I don't know that, that goes away. From our perspective, in order for the transactions to make sense, given our capital costs, that's where we will be pricing going forward.

Great. And then on the regulatory reimbursement front, there's a lot of talk about bundling and how CMS could push patients to home health and away from skilled nursing. Do you have any way to help us quantify the percentage of your tenet volume that could be at risk for the single joint replacement type work that is being looked at by CMS?

Well you have 75 MSAs that you're going to start that formally called the Hip and Knee Project in July and we cover a number of those MSAs. 30% of our Medicare admissions are those qualified patients so you have 30% potentially at risk.

But frankly, it's just way too soon and we've had lots of discussions with our operators about how to attack the marketplace. We know the hospitals are going to control the payments. We know they're going to look at sources to deal with rehab. But I think it's just premature to start thinking about the impact on our operators other than to say the high-end, most qualified post-acute providers are going to get the hospitals' attention.

They're going to get -- sorry, what?

They're going to get the hospitals' attention. They're going to be the go-to players.

Okay. And then if you could comment on how you guys view any potential bad debts. You have 11% of your total rents sub-one times EBITDAR coverage and I think about 0.5% that are not current with rents. If you could give us an update about how you look at that particular subset of your exposure?

Yes. That has not changed quarter-over-quarter but it's larger than it historically has been. There are a number of operators in that grouping that have either strong credits or strong credit support behind it that we feel have absolutely no risk of a nonpayment situation.

But to that end, we are still working with those folks to call out perhaps one bad building that drives the coverage down or one bad market. So we are proactive about trying to clean up of those operators despite an otherwise strong credit background.

I will say I have a couple, three, half a dozen facilities that are just with onesies that we're looking to quite frankly call one way, shape for form or another. Whether it be to move that facility to another operator or sell it or whatever and we've been very proactive about that and we're in the process of doing that as we speak. We do expect that percentage to ultimately go down.

As far as those that are not current, that is a very, very small, less than 0.5% of our current operators. And as I said, those of the operators that we are looking to very likely move that asset.

Thank you.

Kevin Tyler, Green Street Advisors.

The skilled nursing acquisitions that you've reported at this point in the year are not really as high, I guess, as I would've thought we'd see rewinding to the beginning of the year timeframe. I guess, is this because you were being more selective on price given the cap rate color you laid out earlier? Is it a dearth of opportunity? Can you talk a little bit more about either of those things?

Yes. For starters, we're not than with the year as we've indicated, right? But we have been -- we've looked at this year particularly at the beginning of the year, we did a number of assisted living facility deals which move the dial a little bit more in favor of that product type.

Once again, our niche is still skilled nursing facility deals. There was a little bit of a dearth in the second quarter although we still have some time left in the year. There was also some increased competition with some deals as Taylor indicated that we got on that quite frankly we weren't in the running for.

Okay. And then shifting a bit to your commentary on the assisted living side, hearing you guys talk about it in the opening remarks it certainly seems like that's going to be a continued part of the strategy moving forward as you alluded to.

How should I think about that business in terms of overall size? It's 10% of the portfolio now. Does it become 20% and ultimately 30% over the next, call it, 12 months to 24 months? Or is it something that would be just more of a bite-size opportunity at this point?

I think it's a lot sort of what comes out. We're opportunistic acquirers, right?

So if we happen to see a good deal on the assisted living market with one of our existing operators, we will pursue that and it might skew the overall percentage breakdown between skilled and assisted living. But I don't see the dial moving tremendously from 90/10 to --.

To meaningfully move when you talk about going from 10% to 20%, I don't think there's any part of our strategy that gets us that kind of meeting movement.

Okay. That's helpful.

A last one, just on the bigger providers, the larger national operators. We continue to hear about the merits of a being aligned with the largest operators. And it surfaced this morning that ManorCare has struggled again with its operations in part due to Medicare Advantage.

I guess we've talked about this in the past but can you give us an update on where you're seeing Medicare Advantage in your portfolio? Has it been a headwind for your operators? Are they seeing shortened length of stay and some pressure on reimbursement? Just in general, how they performing at this point in time?

Well. Sure.

Their lengths of stay are declining and the reimbursement rates in managed Medicare are a little bit lower, although they tended to just work off of existing Medicare rates as a percentage. Our operators have handled it well.

I can tell you anything about our portfolio, one of our largest tenets is Genesis. We understand what's happening in the Genesis portfolio and we look at our large regional operators and how they've handled Medicare Advantage and they've handled it well. You'd otherwise see it in coverages.

Right. Right. Thanks, guys.

(Operator Instructions)

Chad Vanacore, Stifel.

You addressed what your -- the change in your willingness to pay for acquisitions and you outlined that pretty well. Have you seen any changes from the other side? Are there more or less willing sellers at the new cap rates?

I'm not sure that the cap rates have changed. I think just where our mentality has change a little bit just because of our cost of capital has increased a little bit.

But as far as more sellers out there? No, I think there's still -- a lot of it is cyclical. This time of year there's not a lot of deals coming to market because there is no way they can close by year end. So it's just a natural slowdown.

Whether that picks back up, which would be the normal sort of trend in the first quarter and into the second quarter, that remains to be seen. But there is a seasonal trend here and we are sort of in this slow period of new deals coming into the market.

All right. Thanks, Dan.

What can you tell us about the supply situation in areas where you own senior housing? You say you are limiting new construction to supply constrained markets. If you can add any color there that would be great.

Yes. We are being very careful and selective around those markets. Baton Rouge is a great a couple of a market that is very much under-supplied because of the population shift after Katrina. But there are markets that we're looking at that would quite simply cannot get comfortable with.

By virtue of what we're discussing, we're always talking about the projects we do. We don't tend to talk about the projects we pass on, but those are increasing in volume. The larger MSAs, it's getting sometimes tougher to rationalize coming out of the ground in this part of the cycle.

All right. Thanks. I hit Dan and Steve. I might as well throw in for Bob and I will leave it Taylor out of it because his voice is going.

But you just renewed and up size your available ATM program. So Bob, how should we think about equity issuance here in how you use that ATM program?

We will use it like we historically have based on the deal pipeline. Long term, we've looked to fund our acquisitions 50/50 debt and equity. So at a certain price we will be issuing equity to help fund pipeline.

All right. Thanks a lot, guys.

Tayo Okusanya, Jefferies.

Good morning, everyone. Good quarter. Just a couple of quick ones for me. I did join a little late, so I apologize for that.

Bob, could you talk about why the increase in guidance where some of your underlying assumptions did not seem to change? What was driving that?

The big thing is the initial guidance that we did last quarter was the timing of the bond deal. So that and the timing of acquisitions. Those are the two big things that drives the tightened range that we're getting so close to year end.

Okay. That's helpful.

And then a couple of the other comments about acquisition environment and seasonally things are slowing down, as you mentioned. But you still have to deliver the biggest quarter of all your four quarters this year in terms of deal flow in order to meet your $650 million mark. How confident are you, you can get there given we are already in November?

Based on the pipeline we have today we will get there. But that being said, deals have their own vagaries, whether it's approval from the state authorities or just general timing in getting documents done. As we sit here today we are highly confident.

Okay. That's helpful.

And then lastly, again, a lot of noise when we met at the NIC when we were discussing Genesis stock dropping 10% in one day because of all this noise around the Inspector General and all this kind of stuff going on. As you take a look at the landscape for skilled nursing, what are you hearing from some of your tenants in regards to what the outlook looks like and if there are any real regulatory or reimbursement risk as we head into 2016?

I don't think there's anything specific on the regulatory side. The hits of from the OIG come with some regularity. It's like lightning. It just strikes. You never sort of now where.

The reimbursement front, we have touched upon that a little bit on this call. There's obviously some movement afoot in terms of bundling and other things. I don't think -- while people are dealing with it and getting prepared for it, I don't think there's anything that we can specifically quantify in terms of how it's going to affect our operators in reimbursement.

Specifically in terms of our very large operator pool, we really haven't heard anything coming out of our operators as it relates to the specific issue of high utilization of rehab, other than it's something that OIG's focused on. But none of our operators that come to us and said we have a real concern about X, Y, and Z.

That's helpful. Thank you.

(Operator instructions)

John Roberts, Hilliard Lyons.

On that front you've been covering here with the cost of capital being considerably higher. Do you expect to go a little bit higher on the debt side versus equity in this environment, maybe leverage up a bit more than you might have historically been comfortable with given the drop in stock price?

Well, we are still well inside our stated levered targets, five times debt to EBIDTA. So we have room there.

And to your point, when we start thinking about allocating capital, it's likely, given our stock price, we will use that room. We've not made any decisions to go beyond that and if we do, it's something we would have to talk about.

Okay. Thanks, guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Taylor Pickett, Chief Executive Officer, for any closing remarks.

Thank you for joining our call this morning. Bob Stephenson will be available for follow-up questions.

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