Omega Healthcare Investors' CEO Discusses Q1 2013 Results - Earnings Call Transcript

Transcripts

Omega Healthcare Investors, Inc. (NYSE:OHI) Q1 2013 Earnings Call May 8, 2013 10:00 AM ET

Executives

C. Taylor Pickett – Chief Executive Officer
Daniel J. Booth – Chief Operating Officer
Robert O. Stephenson – Chief Financial Officer
Michele Reber – Investor Relations

Analysts

Jeffrey Nelson Theiler – Green Street Advisors
Omotayo Okusanya – Jefferies & Company
Daniel Bernstein – Stifel Nicolaus
Ross Nussbaum – UBS

Operator

Good morning and welcome to the Omega Healthcare Investors First Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I’d now like to turn the conference over to Michele Reber. Please go ahead.

Michele Reber

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 maybe forward-looking statements, such as statements regarding our financial and FFO 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 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, EBITDA, and expenses excluding owned and operated property. 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.

C. Taylor Pickett

Thanks, Michele. Good morning and thank you for joining Omega’s first quarter 2013 earnings conference call. Adjusted FFO for the first quarter is $0.63 per share, which is a 15% increase over 2012 first quarter adjusted FFO of $0.55 per share. Normalized funds available for distribution, FAD, for the quarter is $0.57 per share. We increased our quarterly common dividend to $0.46 per share. This is a 2.2% increase from last quarter and a 10% increase from the first quarter 2012. The dividend payout ratio is 73% of adjusted FFO and 81% of FAD. We expect our dividend payout ratio for 2013 to be 75% to 85% of adjusted FFO and generally less than 90% of FAD.

We have maintained our 2013 adjusted FFO guidance of $2.45 to $2.50 per share, in FAD guidance for 2013 of $2.20 to $2.25 per share. As Bob will cover later in the call, we sold a significant amount equity in the later part of the first quarter and early in the second quarter. The weighted average shares outstanding will increase significantly in the second quarter which will reduce our quarterly adjusted FFO run rate by approximately $0.02.

During the quarter, Moody’s upgraded our unsecured debt credit rating to BA 1. S&P and Fitch have investment grade ratings on our unsecured debt, while Moody’s remains one notch below investment grade. Our operators continue to perform well and all of our fourth quarter 2012 acquisitions are fully integrated into our reporting and monitoring management systems.

Bob will now review our first quarter financial results.

Robert O. Stephenson

Thank you, Taylor and good morning. Our reportable FFO on a diluted basis was $70.1 million or $0.62 per share for the quarter, as compared to $48.2 million or $0.46 per share in the first quarter of 2012. As Taylor mentioned, our adjusted FFO was $71.7 million or $0.63 per share for the quarter and excludes $1.5 million of non-cash stock based compensation expenses and $134,000 of expenses related to the closing of December 2012 investments. Further information regarding the calculation of FFO is included in our earnings release and also on our website.

Operating revenue for the quarter was $101.8 million versus $84.5 million for the first quarter of 2012. The increase was primarily a result of $17.1 million of incremental lease revenue from a combination of acquisitions completed in 2012, capital improvements made to our facilities throughout 2012 and lease amendments made during that same time period. The $101.8 million of revenue for the quarter includes approximately $7 million of non-cash revenue. We expect that non-cash revenue component to be approximately $7 million per quarter for 2013.

Operating expense for the first quarter of 2013 when excluding acquisition related cost and stock-based compensation expense, as well as the 2012 provision for impairment increased by $4.5 million as compared to the first quarter of 2012. The increase was primarily a result of increased depreciation and amortization expense related to closing of approximately $510 million of new investments in 2012, partially offset by a slight decrease in G&A expense. We project our 2013 annual G&A expense to be approximately $15.5 million assuming no extraordinary transactions or unusual events.

Interest expense for the quarter when excluding refinancing costs and non-cash deferred financing costs was $25.7 million versus $23 million for the same period in 2012. The $2.7 million increase in interest expense resulted from higher debt balances associated with financings related to the over $500 million of new investments completed in 2012.

Turning to the balance sheet for the quarter, in late March, we refinanced approximately $59 million of debt related to 12 mortgage loans guaranteed by the Department of Housing and Urban Development. The 12 HUD mortgage loan had a blended interest rate of 5.55% per annum with maturities in July 2044. The refinanced interest rate is approximately 3.06% per annum with no change in the maturity date on those loans.

Subsequent to the quarter end, in April we notified HUD of our attention to pay $51 million to retire 11 mortgage loans. The loans were assumed as part of the 2010 capital source acquisition, and had a blended interest rate of 6.61%. The expected payoff will result in $11 million non-cash gain on the early extinguishment of fair market value of debt and will be recorded in the second quarter of 2013.

For the three month period ended March 31, 2013 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 $107 million. 600,000 of those 3.8 million were issued in late March, with settlement dates in April. As a result, we recorded an $18 million other asset on our books in March. 2.4 million of the 3.8 million shares were issued in March and therefore only partially reflected in our weighted average share count.

As Taylor mentioned earlier, the weighted average shares outstanding will reduce our adjusted FFO run rate by approximately $0.02 per share but still within our guidance. For the three months ended March 31, 2013, our funded debt to total asset value ratio was 46% which is well within the maximum 60%. Our funded debt to adjusted annualized EBITDA was 4.5 times and our adjusted fixed charge coverage ratio was 3.7 times.

I’ll now turn the call over to Dan.

Daniel J. Booth

Thanks Bob and good morning everyone. As of March 31, 2013, Omega had a core asset portfolio of 477 facilities with over 53,000 operating beds, distributed among 46 third-party operators, located within 33 states. Operator coverage remained stable during the fourth quarter of 2012.

Trailing 12 month operator EBITDARM coverage was two times for the period ended December 31 compared to two times for the period ended September 30. Trailing 12-month operator EBITDAR coverage for the period ended December 31 was 1.5 times, compared to 1.5 times for the period ended September 30. On May 1, 2013, CMS proposed certain policy changes for Medicare payments to skilled nursing facilities. The changes included a proposed 1.4% increase to the market basket index. The increase includes the normal 2.3% increase reduced by a 0.5% forecast error correction, and further reduced by a 0.4% multi-factor productivity adjustment. CMS estimates that the rate increase will result in additional aggregate payments to SNFs of approximately $500 million. We would expect these proposed increases to become final on July 1, and take effect on October 1, 2013.

Turning to our current acquisition pipeline, while no transactions were consummated during the first quarter, we feel confident that our budget acquisition target of $200 million for the year including CapEx is very achievable. As usual, however, the timing of such transaction closings is difficult to predict. Subsequent to the first quarter, on May 2, 2013, Omega closed on a $25 million mezz loan to a new operator. The loan bears interest at 12% and matures in December of 2017. The operator is a highly regarded owner of skilled nursing facilities throughout the Western United States and a company that Omega hopes to do future transactions with. As of today, Omega has 500 million available under our revolver for new investments.

C. Taylor Pickett

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

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Jeff Theiler of Green Street Advisors. Please go ahead.

Jeffrey Nelson Theiler – Green Street Advisors

Hey, good morning guys.

C. Taylor Pickett

Good morning, Jeff.

Jeffrey Nelson Theiler – Green Street Advisors

Just a couple of quick questions here. The 1.4% Medicare, a proposed Medicare rate increase, where would you see coverages trending on that? Is that enough to keep them flat, or do they rise slightly? Or how do you think about the impact of that rate on your coverages?

C. Taylor Pickett

At that rate I think we will look at coverages is being flat.

Jeffrey Nelson Theiler – Green Street Advisors

Okay and then, moving to your capital renovation project. You did the $10 million this quarter. Is there significant room to ramp that up as operators continue to adjust to the new, the changes in the healthcare system? Do you see that number increasing over the years as we go forward?

C. Taylor Pickett

We have over a $100 million committed to the capital projects right now. So, yeah, I mean the first quarter was a little slow just because it was really no method to it, it just was what it was. We expect that to ramp up as the year goes on actually.

Jeffrey Nelson Theiler – Green Street Advisors

And then going forward, as you look into out years, do you see even potential to ramp that up even more? Or do you think that run rate for the year is a pretty good one to assume?

C. Taylor Pickett

I think you can probably assume that run rate for the year might be a tad bit conservative. The only thing I would add to Dan’s comment is, we have $100 million committed, and most of these projects have at the most, a 24 month life cycle. You kind of think about it that way and commitments behind that will continue to fill in. But I would say the run rate at $10 million, $12 million a quarter is probably a pretty good estimate.

Jeffrey Nelson Theiler – Green Street Advisors

Okay, great. And then lastly, this mezz loan, can you just talk a little bit more about how that came about, and how you get comfortable with the 12% return versus buying new assets, whole assets at a 10% return?

C. Taylor Pickett

I think the main reason behind that loan, yeah it was a little unique for us. But we did like the operator, and we do feel that there is potential to do more deals with that operator. If the company is very solid and has a strong balance sheet and so we felt comfortable with the 12% versus the normal 10% that we’re doing on our sale lease backs. So and that was kind of a little bit of the background on that transaction. It’s relatively small. Its $25 million and we really do think it leads us to potentially do more deals with this company.

Jeffrey Nelson Theiler – Green Street Advisors

So was this – does it get your foot in the door, so to speak?

C. Taylor Pickett

It was.

Jeffrey Nelson Theiler – Green Street Advisors

All right, thanks very much.

C. Taylor Pickett

Thanks Jeff.

Operator

The next question comes from Tayo Okusanya of Jefferies. Please go ahead.

Omotayo Okusanya – Jefferies & Company

Yes, good morning.

C. Taylor Pickett

Good morning Tayo.

Omotayo Okusanya – Jefferies & Company

A couple of questions. Apart from everything we’ve kind of seen on the Medicare end, could you talk a little bit about, at the state level, what you are hearing in regards to Medicaid, and what could happen when states start up their budgets July 1?

C. Taylor Pickett

The general sense is at the state and our view is that overall rates will be fairly flat. There are a number of states where we think there will be some very, very modest increases. I think the bigger dynamic at the state level is and we’ve seen it in Ohio is the movement to push dual-eligible both Medicaid and Medicare eligible recipients into managed care plans. And that’s happened in Ohio. And you know we think that we may see some of that trend across states where they take the highest and most difficult patients and push them into a managed care environment. But in terms of Medicaid rates, flat to slightly up is where we are.

Omotayo Okusanya – Jefferies & Company

Okay. And that push more towards managed care, do you guys kind of see like that generally as a net negative for you?

C. Taylor Pickett

I don’t think it’s a net negative, I think it’s going to be a negative for operators that have small footprints “mom and pops.” For the bigger regional players, I think that will end up being a positive.

Omotayo Okusanya – Jefferies & Company

Okay, that is helpful. I think could you just talk, secondly, just about kind of your largest tenant, Genesis, and they’ve kind of merged with Sun Health at this point. They’re talking about a certain amount of synergies that they are hoping to get out of that merger. Just kind of what your overall take is on that particular tenant, and how well they are doing, and kind of opportunities for coverages to kind of rise with that particular tenant in particular?

C. Taylor Pickett

I mean overall I think that transition has went smooth from their perspective and from ours, it was obvious they bit off the Sun portfolio, which was sizeable and which was performing well. So we don’t have a number a lot of historical numbers under our belt since that acquisition took place to see how they’re doing. But everything that we’re hearing has been good. They are recognizing synergies, and we expect them to recognize some more on a go-forward basis.

Omotayo Okusanya – Jefferies & Company

Okay. And then last question, just guidance-wise. An AFFO of $0.63 this quarter, you kind of annualize that, you’re at $2.52. You’re probably still going to get some accretive acquisitions going forward, but really no big change to guidance. Could you just help us to reconcile the missing pieces in regards to why guidance wasn’t raised?

Robert O. Stephenson

Yes, Tayo, as we mentioned in the talking points that we issued a lot of equity of over 2.4 million shares in late March. And as a result approximately from an equity standpoint about a $0.02 reduction in the AFFO run rate. And that’s just on a run rate based on first quarter, so that puts us in our guidance range.

Omotayo Okusanya – Jefferies & Company

Right, okay, very helpful. Thank you very much.

C. Taylor Pickett

Thank you.

Operator

(Operator Instructions) Our next question comes from Daniel Bernstein of Stifel Nicolaus. Please go ahead.