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Omega Healthcare Investors, Inc. (NYSE:OHI)

Q4 2008 Earnings Call Transcript

February 06, 2009 at 10:00 am ET

Executives

Taylor C. Pickett - Chief Executive Officer, Director

Daniel J. Booth - Chief Operating Officer

Robert O. Stephenson - Chief Financial Officer

Michelle Rieber - Investor Relations

Analysts

Jerry Doctrow - Stiffel Nicolaus & Company, Inc.

Omotayo Okusanya - UBS

Operator

Good day everyone and welcome to the Omega Healthcare fourth quarter earnings investors conference call. Today’s conference is being recorded. At this time for opening remarks and introduction, I would like to turn the conference over to Michelle Rieber. Please go ahead, ma’am.

Michelle Rieber

Thank you. Good morning. Comments made during this conference call that are not historical facts may be forward-looking statements, such statements regarding our financial and FFO projections, dividend policy, portfolio restructurings, rent payments, financial condition or prospects of our operators, and the 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 Form 10-K, which identify 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, 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 Report section of our website and in the case of FFO and adjusted FFO, in our press release issued today.

I will now turn the call over to our CEO, Taylor Pickett.

Taylor Pickett

Thanks, Michelle. I will review our adjusted fourth quarter 2008 FFO, 2009 adjusted FFO guidance and Omega's current capital and acquisition strategy.

Adjusted FFO for the fourth quarter is $0.37 per share. Annual 2008 adjusted FFO is $1.45. We have maintained the common dividend at $0.30 per share, which is a payout ratio of 81% and is within our historic range of 80% to 85%. We have two facilities in Vermont which are being managed by Genesis and which remained as owned and operated asset pending Vermont licensure. The Vermont assets generated approximately $100,000 in income for the four months, September through December, which has been included in adjusted FFO. The allocated rent that will be paid by Formation when the licensing of the Vermont facilities is processed is approximately $500,000 per quarter.

Our 2009 adjusted FFO guidance is $1.47 to $1.50 per share. This guidance reflects no capital market or acquisition activity. Turning to our capital and acquisition strategy, we have over $200 million available on our line of credit which matures in March 2010 and no other debt maturities prior to 2014. Our balance sheet is incredibly strong with debt to adjusted EBITDA at 3.2 times. In the fourth quarter we closed one $19.5 million acquisition with the current operator. We expect in 2009 to take a very conservative approach to new investments focusing primarily on the needs of our existing operators. Bob Stephenson, our Chief Financial Officer, will now review our fourth quarter financial results.

Robert Stephenson

Thank you, Taylor and good morning. Our reportable FFO on a diluted basis was $26.3 million or $0.32 per share for the quarter as compared to $23.7 million or $0.35 per diluted share in the fourth quarter of 2007.

As Taylor described, our adjusted FFO is $30.5 million or $0.37 per share for the quarter, which excludes a $3.9 million impairment charge, a $1.9 million net loss associated with our owned and operated assets, non-cash restricted stock compensation expense of $500,000, and a $2.1 million gain on the repurchase of a portion of our preferred stock. Further information regarding the calculation of FFO is included in our earning's release and on our website.

Operating revenue for the quarter when excluding owned and operated nursing home revenue was $44.3 million versus $39.6 million for the fourth quarter of 2007. The $4.7 million increase was primarily a result of approximately $2.8 million of rental income associated with $92 million of acquisitions completed since December of 2007 and approximately $2 million of mortgage interest income associated with $70 million of new mortgage financings placed in 2008.

Operating expense for the fourth quarter 2008, when excluding nursing home expenses and provisions for impairment, increased by $1.3 million as compared to the fourth quarter of 2007. The increase is primarily the result of additional depreciation expense associated with acquisitions completed in 2008. During the quarter, we recorded a $3.9 million impairment charge to reduce the value of one facility to its estimated market value.

Interest expense for the quarter was $8.9 million versus $10.1 million for the same period in 2007. The reduction was primarily due to lower average borrowings on our balance sheet combined with lower LIBOR rates. During the quarter, we purchased 400,000 shares of our 8.375% Series D preferred stock at a price of $18.90 per share or a discount of 24% to its liquidation preference of $25 per share. This equates to an 11.1% effective yield. As a result of this transaction, we recorded a $2.1 million net gain during the quarter.

Turning to the balance sheet, at December 31st, 2008, we had approximately $1.4 billion of total assets. During the twelve months ended December 31st, 2008, we had several transactions which impacted our balance sheet. Some of the highlighted ones are as follows. Year-to-date, we completed $182 million of new investments comprised of $112 million in new leases and $70 million in new mortgage financings. In October, we purchased 400,000 shares of our Series D preferred stock. In September, we completed a 6 million common share offering generating net cash proceeds of approximately $97 million. In July, we sold two rehab hospitals for $29 million that were classified as held-for-sale generating a gain of just under $12 million and in May, we completed a 5.9 million common share direct placement offering generating net cash proceeds of approximately $99 million.

At December 31st, 2008 we had $192 million available on our $255 million credit facility which matures in March 2010. Our credit facility is made up of the syndication of financial institutions led by Banc of America and includes UBS, Deutsche Bank, GE Capital, and Citicorp. Outside of the credit facility, we have no other debt maturities until 2014. As of today, we have cash and credit facility availability of approximately $209 million. On the liability side of the balance sheet, we had $548 million of debt at December 31st, 2008.

For the three months ended December 31st, 2008, our total debt-to-EBITDA was 3.8 times and our fixed charge coverage ratio was 3.1 times. However, and this is very important to note, when you exclude nursing home revenues and expenses and you pro forma in to December 31st, 2008 acquisition assuming that it closed on October 1st, 2008, our total debt-to-EBITDA would approximately 3.2 times and our fixed charge coverage ratio will be just shy of 4 times.

I will now turn the call over Dan Booth, our Chief Operating Officer.

Dan Booth

Thanks, Bob, and good morning everyone. As of December 31st, 2008, Omega had a core asset portfolio of 255 facilities distributed among 25 third-party operators located within 28 states. Operator coverage ratios remained strong during the third quarter of 2008.

Trailing 12-month EBITDARM coverage for the period ended 9/30/08 was 2.1 times versus 2.1 times for the period ended June 30th, 2008. Trailing 12-month EBITDAR coverage was 1.7 times as of September 30th versus 1.7 times as of June 30th. Turning to new acquisitions, on December 31st, 2008, the Company completed a $19.5 million investment with subsidiaries of Formation Capital, an existing operator of the Company. The transaction involved the purchase and lease back of two skilled nursing facilities located in West Virginia with the total of 291 beds. The facilities in the related $2.4 million of initial annual rent was added to an existing Master Lease with Formation.

The amended and restated Master Lease now includes 16 facilities and $12.7 million of annual rent which include annual escalators. The two former Haven facilities located in Vermont and the related $2 million of additional rent will be added upon receipt of the appropriate regulatory approvals. As part of the transaction, affiliates of Genesis Healthcare entered into a long-term management agreement with Formation to oversee the day-to-day operations of each of these facilities.

During 2008, the Company completed a total of $183.1 million of new investments. All of these investments were with existing operators of the Company totaling 25 new facilities consisting of 2462 beds. The resulting initial rent for debt service totaled $19.4 million for an initial return of 10.61%. As Taylor previously indicated, in 2009 we expect to take a very conservative approach to new investments focusing primarily on the capital needs of our current operators.

Taylor Pickett

Thanks, Dan. We will now take questions.

Question-and-Answer Session

Operator

(Operator's instruction) Your next question comes from the line of Jerry Doctrow - Stiffel Nicolaus & Company, Inc.

Jerry Doctrow - Stiffel Nicolaus & Company, Inc.

I just have a couple of things. One, just on the acquisition that you made in the quarter, I guess what is the most interesting there to us is the initial yield and I was wondering if you could give a little more color on maybe the coverage ratios and how reflective you think that is really of current markets? I am trying to figure out what is the cap rate used on any be really?

Robert Stephenson

Sure. The yield obviously reflects our view of cost to capital heading into the end of 2008 and frankly it is a deal that the yield went up in the process of negotiations in order for us to get approval at the board level to close the deal but the properties are in West Virginia. It is a great state. We feel really strongly that Formation Genesis will do quite well and the coverage ratios are north of our standard 1.25. But I do not think I would correlate all that together to start thinking about cap rates in the industry because we just have not seen enough product coming through to say here is where cap rates are falling out. It is more of a function of views of cost to capital as we headed towards the end of 2008.

Jerry Doctrow - Stiffel Nicolaus & Company, Inc.

Okay. So, I mean if I put 1.25 coverage on a 12.3, I am getting close to 15% cap. What is your sense where cap rates maybe these days?

Robert Stephenson

I think traditionally 12.5 has been our cap rate over the long term and that is probably the low end today and the high end is 15 or 16. It is going to depend on the quality of the product and the view as an example. In this situation, we believe the operators are going to be all improved those operations, not unlike you see transactions in the Ensign to the world where they acquire properties and they know they are going to be able to do better.

Jerry Doctrow - Stiffel Nicolaus & Company, Inc.

Okay. Obviously, you still have a year or so in the line but any preliminary discussions with lenders you are feeling comfortable with renewal there at this point?

Robert Stephenson

We feel good about renewal with some or all the current players in the current syndicate. We talked to most everybody. The expectation from our view is that we will sit down in the summer hopefully in a better lending environment and we have less than $50 million out in the line today and we feel pretty good about the outputs that have been in place that will make that up.

Jerry Doctrow - Stiffel Nicolaus & Company, Inc.

Okay. Let us see, you talked about acquisitions obviously be modest at this point. Repurchases additional preferred is that something we might see as well in 2009 if you got the right opportunity?

Robert Stephenson

It will obviously be opportunistic and it is a better board level of discussion I think to the extent that we see our preferred slip down and there is some buy end to be acquired. There is a possibility if we look at buying more but it is going to be a decision with the board as the time comes.

Jerry Doctrow - Stiffel Nicolaus & Company, Inc.

Okay and then maybe just one or two more if you got it, the timing of the Vermont licensure, I mean obviously it is not within your control but you were talking about or Dan was talking about going, I think with $2 million of annualized rent starting, any sense about when that may flip over?

Robert Stephenson

It truly is in the hands of the Vermont state regulators. We thought it would move a little bit quicker than this, not having a tremendous amount of experience with Vermont itself but it has gone slower than expected and I cannot really pinpoint the date at this point. I do not want to mislead. I think we have to wait on the Vermont regulators.

Jerry Doctrow - Stiffel Nicolaus & Company, Inc.

Okay. It is a 2009 event, maybe first half event, could you say that?

Dan Booth

We sure hope so.

Jerry Doctrow - Stiffel Nicolaus & Company, Inc.

Okay and maybe just one general question for any of you, just a little more color just onto the nursing home. It sounded like there is reimbursement performance out there and it sounded like the coverage has remained flat. But if you could just give a little color there and I will drop off.

Robert Stephenson

In terms of rates, we have seen, obviously we have increase in the Medicare rate in October and you see that flow through. There is a lot of noise on the Medicaid front but the reality from a rate perspective is they have held relatively flat and that is our expectation going forward that there will be a lot of noise as the states work through budget issues. We will see what happens from the federal perspective but we believe for the most part, rates will stay flat and coverage will follow.

Operator

(Operator's instruction) Your next question comes from the line of Omotayo Okusanya - UBS.

Omotayo Okusanya - UBS

Quick question, just when I looked at guidance versus consensus, I know your numbers do not include any acquisition guidance but could you give us a sense of kind some of what is in your number that you end up at $1.47 to $1.50 versus consensus numbers and what do you think some of the differences may be?

Taylor Pickett

Our guidance is to $1.47 to $1.50 really works off of our fourth quarter run rate of $0.37 and so without any acquisitions, that is our current view. I am not sure, I do not know if there are any big differences. Bob, do you have any?

Robert Stephenson

No, that is really it is in the guidance. After the call, we can go through that in more detail.

Operator

(Operator's instruction) And it appears we have no further questions on the phone at this time. I would like to turn the conference back over to the speakers for any additional or closing remarks.

Taylor Pickett

Thank you for joining our fourth quarter earnings release call. Bob Stephenson, our CFO, will be available for any follow-up questions that you may have.

Operator

And again ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may disconnect at this time.

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