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Executives

Michelle Reiber – Investor Relations

Taylor Pickett – Chief Executive Officer

Bob Stephenson – Chief Financial Officer

Dan Booth – Chief Operating Officer

Analysts

Kirk Streckfus – Stifel Nicolaus

Ray Garson – Brigade

Omega Healthcare Investors Inc. (OHI) Q2 2010 Earnings Call August 5, 2010 10:00 AM ET

Operator

Good day, everyone. And welcome to the Omega Healthcare Investors Earnings Second Quarter Conference Call. This call is being recorded.

At this time, for opening remarks and introductions, I would now like to turn the call over to Ms. Michelle Reiber. Please go ahead ma’am.

Michelle Reiber

Thank you and good morning. 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 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 our CEO, Taylor Pickett.

Taylor Pickett

Thanks, Michele, and good morning. Adjusted FFO for the second quarter is $0.37 per share. We expect our adjusted FFO to increase significantly as a result of closing both the CapSource option portfolio and HUD portfolio in June.

Prior to the CapitalSource closings, we were carrying a significant cash balance that was earning almost no interest and the related negative arbitrage between our cost of capital and the low interest earnings cash depressed our core second quarter results.

Based on our third quarter adjusted FFO expectations, we increased our common dividend by $0.04 per share up to $0.36. This reflects a payout ratio within our historical policy range of 80% to 85% based on the midpoint of our adjusted FFO run rate guidance.

Turning to FFO guidance, we’ve maintained our quarterly adjusted FFO guidance range of $0.43 to $0.46 per share. This run rate reflects the CapitalSource closings and does not reflect new equity issuances or other capital market transactions. In addition to closing the CapitalSource transactions and increasing the common dividend by 12.5%, Omega also established a $140 million equity shelf program.

From the operations perspective we have fully assimilated all the CapitalSource assets and we have increased our professional staff to allow us to continue to source and close on new acquisition opportunities.

Bob Stephenson, our Chief Financial Officer, will now review our second quarter financial results.

Bob Stephenson

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $29.7 million or $0.32 per share for the quarter as compared to $28.6 million or $0.35 per diluted share in the second quarter of 2009.

Our adjusted FFO was $34 million or $0.37 per share for the quarter and excludes $3.5 million associated with the write-off of deferred financing facility costs, $1.2 million of acquisitions related expenses, non-cash restricted stock compensation expense of $467,000, a $155,000 impairment charge on our real estate assets and it also excludes a $789,000 gain from the sale of two mortgage backed securities and $159,000 of net income associated with our owned and operated assets. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter when excluding owned and operated nursing home revenues was $55.8 million versus $44.8 million for the second quarter of 2009. The increase was primarily a result of $9 million of revenue associated with the CapitalSource acquisitions completed on December 22, 2009, June 9, 2010 and June 29, 2010. And approximately $1 million of other investment income associated with two bonds we purchased in the first quarter of 2010 that were redeemed in the second quarter of 2010.

Operating expense for the second quarter of 2010 when excluding nursing home expenses, provision for impairments and acquisition deal related expenses increased by $6 million as compared to the second quarter of 2009.

The increase was primarily the result of additional depreciation expense associated with 500 -- excuse me, $860 million of CapitalSource assets acquired in December 2009 and June 2010, as well as additional G&A also related to the acquisitions.

Interest expense for the quarter when excluding non-cash deferred financing costs was $14.7 million versus $8.7 million for the same period in 2009. The increase of $6 million in interest expense resulted from higher debt balances associated with three things.

First, a full quarter of interest related to our 200 million, 7.5% bond due 2020 that were issued in February of 2010, second, borrowings from our credit facilities that were used to complete the CapitalSource acquisitions, and third, assumed debt, primarily HUD that also related to the CapitalSource acquisitions.

We completed a number of transactions in 2010 which have a significant impact on our balance sheet. In February we issued and sold 200 million 7.58% senior unsecured notes due 2020. During the first six months of 2010, we sold 3.8 million shares of new common stock under our equity shelf program generating net proceeds of approximately $74 million. In April, we entered into a new $320 million revolving senior secured credit facility which matures in April 2014. In June, we entered into a new $140 million equity shelf program.

And lastly, in two separate closings in June, we acquired 103 facilities from CapitalSource for approximately $560 million. Consideration paid consisted of $358 million in cash, $53 million of assumed HUD debt that bares a blended interest rate of 6.61%, $129 million of assumed HUD debt having an interest rate of 4.85%, $20 million of assumed subordinated 9% notes and $3 million of Omega common stock and in addition, we issued $15 million of Omega common stock as consideration for certain escrow amount churn transferred at closing.

At June 30, 2010 we had approximately $2.3 billion of total assets. On the liability side of the balance sheet, we had $1.2 billion of debt and we had $99 million of revolving credit facility available for use. As of today, we have $120 million in combined invested cash and credit facility availability to use.

For the three months ended June 30, 2010 Omega’s total debt to annualized EBITDA was 5.9 times and our fixed charge coverage ratio was 2.4 times. More importantly, when you pro forma in EBITDA from the June CapitalSource acquisitions, assuming they closed on April 1, 2010 and eliminate the acquisition deal related costs, the one-time gain from the sale of the security and the impairment charge, Omega’s total debt to adjusted pro forma annualized EBITDA is approximately 4.6 times.

I’ll now turn the call over to Dan Booth, our Chief Operating Officer.

Dan Booth

Thank you, Bob, and good morning, everyone. As of June 30, 2010, Omega had a core asset portfolio of 395 facilities distributed among 46 third-party operators located within 34 states. Included in the facility totals are 103 assets that were acquired from CapitalSource in two separate closures both decline in June of 2010.

Affective June 9, 2010, Omega closed on a group of 63 facilities as part of the previously announced CapitalSource transactions. The portfolio represents over 6700 beds located in 19 states, which are part of 30 in place leases with 18 separate operators.

In addition, Omega also closed on another group of 40 facilities affective June 29, 2010. This portfolio of assets represents nearly 5000 beds located in Florida and Mississippi, and is part of 13 in place leases with two separate operators. Both of these acquisitions represent the final two stages of the CapitalSource transactions originally announced in November of 2009.

Operator credit ratios for the Omega portfolio, which includes the 40 CapitalSource assets acquired in December 2009, but excludes the 103 recently acquired CapitalSource assets, remain stable during the first quarter of 2010. Trailing 12-month EBITDARM coverage for the period ended March 31st was two times versus two times for the period ended December 31, 2009. Trailing 12-month operator EBITDA coverage was 1.6 times as of March 31 versus 1.6 as of December 31, 2009.

We anticipate that flat operator revenue coupled with the current state of inflation will provide modest pressure on operator coverage ratios in future quarters. The coverage ratios for the 103 facilities acquired in June are substantially similar to the portfolio as a whole and are therefore not expected to change Omega’s overall coverage ratios.

With the conclusion of the CapitalSource acquisitions in June 2010 Omega has transformed into one of the country’s largest and most diversified skilled nursing portfolios with 46 third-party operators overseeing the operations of nearly 400 facilities located in 34 states. The new assets which have already been integrated into Omega’s existing portfolio are consistent with the company’s existing portfolio in terms of rent coverage and provide enhanced diversity in terms of geography and operator mix.

In addition and as expected, the new diversified operator base is provided -- is proving to be a significant source of growth opportunities in terms of capital improvements, new construction and acquisitions.

Overall, Omega continues to see a steady pace of potential investment opportunities. As previously stated Omega has nearly $120 million in revolving credit capacity in order to potentially take advantage of some of these investment opportunities.

Taylor Pickett

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Jerry Doctrow with Stifel Nicolaus.

Kirk Streckfus – Stifel Nicolaus

Good morning. This is actually Kirk Streckfus in for Jerry. Just a few questions for you. Are you seeing any changes in the acquisition environment, any additional color there would be great?

Taylor Pickett

We haven’t really seen changes in the acquisition environment. The pipeline has been relatively active. I’d say consistent with the pipeline we’ve had seen in prior years when we were doing $2 or $300 million in acquisitions annually. So, but in terms of pricing and otherwise, I don’t -- we haven’t seen any big changes there.

Kirk Streckfus – Stifel Nicolaus

Okay. And just a couple questions for you in terms of reimbursement. Just -- what are you hearing right now about RUG-IV getting implemented this October? Many of the operators we’ve spoken with are optimistic that it may get reversed. Is there any specific piece of legislation going to Congress in the next couple of months that you think would include this?

Taylor Pickett

I think what you’re hearing from the operators is consistent with what we’re hearing, that we may see it happen, what piece of legislation gets attached to, I don’t know.

Kirk Streckfus – Stifel Nicolaus

Okay. Fair enough. And we heard one of your competitors and one of your largest tenants sound really upbeat last week about where the rates are going to end up under the, given the market basket and the new 13 RUGs. Are you hearing any similar tone from your other tenants?

Taylor Pickett

I think there is a general sense that from a Medicare perspective the news that has come out, the market basket increase and the potential for the 13 new RUGs categories with the RUG-IV, its all positive and concurrent therapy will affect operators but it won’t be that dramatic.

So on the Medicare side, I think there is as a general sense that that their stability and a little bit of optimism. On flipside Medicaid still the unknown equation. The good news is we basically seen rates held flat. It looks like Congress is going to push through additional [FMA] money that will continue through June of 2011, just likely to happen the next couple of days. So our sense of it is general stability in rates, which is all you can look for in this economy.

Kirk Streckfus – Stifel Nicolaus

And just going beyond 4Q or first quarter of next year, I mean, do you think it is fair to assume the new RUGs offer an opportunity for you guys to grow the occupancy in your portfolios just giving your customers will likely be targeting longer length of stay patience?

Taylor Pickett

You would think that that may be the case but we’ve seen occupancies essentially flat for a number of years now.

Kirk Streckfus – Stifel Nicolaus

Okay.

Taylor Pickett

And my sense is that that trend isn’t going to change, if we see occupancy bumps it is going to be very modest.

Kirk Streckfus – Stifel Nicolaus

Okay. Thank you very much.

Taylor Pickett

Thank you.

Operator

Thank you, sir. (Operator Instructions) Our next question comes from [Ray Garson] with Brigade.

Ray Garson – Brigade

Hi. Thanks. I just had a question with respect to the capital structure. Do you guys continue to think having bank debt in the cap structure, is going to be the way you are going to proceed here just given where the fixed rate environment is or should we expect maybe some more bond deals?

Taylor Pickett

We typically have been able to access the bond market in the sevens and to the extent that we need capital in the bond market’s pricing in the 7% to 7.5% range, we may go there. But at this time, we have enough availability to handle modest transactions and we don’t have any specific plan in terms of equity or bonds and how we will finance. But I will say, where rates are today, the bond market is certainly a potential source of capital for us.

Ray Garson – Brigade

Okay. Then, I guess, I have a more macro question. I remember a few years back there were a bunch of what used to be publicly traded nursing homes that went private and I think a lot of that real estate was financed with CMBS and other debt that maybe is getting time to refinance.

And I am just curious is that, are you guys looking at that as a source of acquisition activity or do you have any color with respect to what might happen to some of those assets and maybe they make their way back to REIT hands.

Taylor Pickett

Yeah. We don’t look at those as a source necessarily but there are certainly a number of portfolios that have maturities coming due and to the extent that REIT capital is part of the answer, we look to play.

But I know that a lot of those companies are looking at all different alternatives and from our perspective we have plenty to do with the existing portfolio and the opportunities that are generated by our current operators.

Ray Garson – Brigade

Thank you.

Taylor Pickett

Thank you.

Operator

Thank you, sir. I am showing no more questions and I’d like to turn the call back over to Mr. Pickett for his final comments.

Taylor Pickett

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

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Source: Omega Healthcare Investors Inc. Q2 2010 Earnings Call Transcript
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