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Omega Healthcare Investors Inc. (NYSE:OHI)

Q4 2007 Earnings Call

January 31 2008 10:00 am ET

Executives

Tom Peterson - Director of Finance and IR

Bob Stephenson - CFO

Dan Booth - COO

Taylor Pickett - CEO

Analysts

Christian Brown – Deutsche Bank

Jerry Doctrow - Stifel Nicolaus

Charles Place - Ferris, Baker Watts

Operator

Good day everyone and welcome to today's Omega Health Care Investors conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Tom Peterson, Director of Finance and Investor Relations.

Tom Peterson

Thank you, 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 restructuring, 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 different materially.

Please see our press releases and our filings with the Securities and Exchange Commission, including without limitation our Form-10K 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 at 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 Principle, as well as an explanation of the usefulness of the non-GAAP measures are included in our press release issued today or in the case of per share information, available under the “financial reports” section of our web-site and in the case of FFO and adjusted FFO in our press release issue today.

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

Taylor Pickett

Thanks, Tom and good morning. I’ll review our adjusted fourth quarter 2007 FFO, our 2008 adjusted FFO guidance, the current acquisition environment and I will briefly comment on recent events.

Adjusted FFO for the fourth quarter is $0.35 per share. Adjusted FFO for 2007 is $1.38 compared to $1.24 per share for 2006; representing year-over-year growth of 11%.

2007 is the fourth year in a row that adjusted FFO growth has exceeded 10%. As a result of our strong performance during the quarter we increased the common dividend by one penny to $0.29 per share. This represents the 13th quarterly dividend increase in the last 17 quarters, with the common dividend increasing from $0.15 in the third quarter of 2000 to '08 to $0.29 per share today.

Turning to 2008 adjusted FFO guidance; our 2008 adjusted FFO guidance is $1.41 to $1.43 per diluted share, this guidance does not include acquisitions, as acquisitions are closed during 2008, we will adjust the guidance upwards to reflect the impact of future adjusted FFO.

The acquisition pipeline is active. We've a couple of transactions in the later stages of the pipeline that may close by the end of the first quarter; we believe that opportunities will continue to emerge throughout 2008. Turning to recent events in the last few weeks we closed on a single facility acquisition in New Mexico; the impact of this acquisition is included in our guidance. In addition we exercised our option to purchase GE’s first mortgage position on seven Haven facilities.

By exercising this option, Omega now has additional control over the 15 Haven facilities that we are invested in. Haven is currently operating under Chapter 11 bankruptcy protection as part of Haven's deterrent possession financing budget which is subject to A final court order on February 13. Omega expects to be paid current throughout the bankruptcy proceedings. It is likely that Haven's contractual commitments to Omega will be assumed by Haven or another operator all as a part of an organized plan to exist bankruptcy. Also we have now resolved all of our IRS aggregate related issues with the final signed closing agreement.

I will turn the call over to Bob Stephenson, our Chief Financial Officer who will review the fourth quarter financial results.

Bob Stephenson

Thank you, Taylor and good morning. Our reportable FSO on a diluted basis was $23.7 million or $0.35 per share for the quarter as compared to $19.2 million or $0.32 per diluted share in the fourth quarter of 2006. As Taylor described our adjusted FSO is $24.1 million and $0.35 per share for the quarter, which excludes non-cash restricted stock-compensation expense of $545,000, a non-cash provision for impairment adjustment of $220,000, a $125,000 provision for income tax adjustment, and $66,000 of FIN 46 consolidation adjustments. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter was $39.6 million versus $36.1 million for the fourth quarter of 2006. The $3.5 million increase was primarily a result of $40 million of new investments completed during the third quarter of 2007 and placing abdicate on a straight line rent recognition in 2007.

The fourth quarter 2007 operating expense was aligned with our 2006 fourth quarter operating expense, when you exclude the fourth quarter of 2007 provision for impairment adjustment of $220,000, and a non-cash stock based compensation expense of $545,000. The $220,000 provision for impairment adjustment was recorded to increase the value of one facility currently being market for sale to estimated market value. We anticipate this facility will be sold during the first quarter.

In the fourth quarter of 2006 the company recorded a $765,000 non-cash provision for uncollectable notes receivable.

Interest expense for the quarter was $10.1 million versus $11.9 million for the same period in 2006. The reduction was primarily due to lower average debt on our balance sheet. As of December 2006 we had accrued $5.6 million for potential tax liabilities for fiscal years 2002 to 2006 associated with the abdicate related party tenant issue.

During the third quarter of 2007, we completed and followed our 2006 federal tax return and paid $2.1 million of the $5.6 million previously accrued for the year 2002 to 2006. In addition as Taylor previously mentioned, in the fourth quarter of 2007 we entered into a closing agreement with the IRS and paid the additional $3.5 million previously accrued.

As a result of the closing agreement and the resolution of the related party tenant issue, we do not expect to incur Federal income tax expense associated with the related party tenant income in periods commencing after January 1, 2007.

Turning to the balance sheet, at December 31, 2007 we had approximately $1.2 billion of total assets or an increase of approximately $7 million versus December 31, 2006.

The increase is primarily due to the $40 million of acquisitions completed during the third quarter of 2007, all set by normal or cumulative depreciation.

At December 31st, 2007 we had credit facility availability of approximately $205 million. On the liability side of the balance sheet, we had $574 million of debt at December 31, 2007.

For the three months ended December 31, 2007, Omega’s total debt to EBITDA was 3.9 times our fixed charge coverage ratio was approximately 2.8 times. If you exclude the non-cash provision for impairment adjustment and the non-cash restricted stock compensation expense, our total adjusted debt to adjusted EBITDA was approximately 3.7 times. I’ll now turn the call over to Dan Booth, our Chief Operating officer.

Dan Booth

Thanks Bob and good morning everyone. As of December 31, 2007 Omega had a core asset portfolio of 236 facilities distributed among 28 third party operators located within 27 states. Operator coverage ratio has remained very strong during the third quarter of 2007. Trailing 12 month EBITDAR coverage for the period ended 9/30/07 was 2.2 times versus 2.2 times for the period ended June 30, 2007. Trailing 12 month EBITDAR coverage was 1.8 times as of 9/30/07 versus 1.7 times as of June 30, 07.

On January 17, 2008 Omega purchased a 119 bed Skilled Nursing facility in Albuquerque, New Mexico for $5.2 million. The facility was added to an exciting 7 facility master lease with Alpha Health Care Properties.

The initial annual lease payment amount is $520,000. On January 22, 2008 Omega completed a transaction with GECC to purchase on existing $39 million mortgage due October 2012 on seven Haven skilled nursing facilities. The company has an existing $23 million second mortgage on the same seven facilities. Omega now has a $62 million combined mortgage on the seven facilities, with the return of 10.4%.

The Company also has a purchase option on the seven facilities that would allow the company to acquire the fee simple interest in the facilities for the amount of the mortgage. If the company exercises the purchase option, the seven facilities would be combined with an existing eight facility master lease. The borrowers and guarantors under the mortgage, and the lessee, sublessees and guarantors in respect of the master lease are all debtors-in-possession in the Chapter 11 proceedings being administered in New Haven Connecticut. Omega feels confident that it is adequately secured and that eventually these facilities will emerge bankruptcy, as a better capitalized company.

As of today Omega has a $166 million in cash and credit availability to find potential new investments.

Tom Peterson

Thanks Dan. This concludes our prepared comments. We'll now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll go first today to Christian Brown of Deutsche Bank.

Christian Brown – Deutsche Bank

Hi, good morning guys I just have a couple of questions. I guess the first is on the purchase option, is there a timeframe for the purchase option or how does that work exactly?

Taylor Pickett

Are you talking about Haven?

Christian Brown – Deutsche Bank

Haven, yes.

Taylor Pickett

The purchase option is exercisable at the end of the mortgage term in 2012 or in the event of default. Haven is currently in an event of default, so it is exercisable currently. And there is a possibility we'll exercise it. The exercise is the amount of mortgage, so there wouldn't be any additional cash consideration from Omega.

Christian Brown – Deutsche Bank

Okay, and then on the SNF that you purchased in January recently. Do you think the pricing was the difference than it would have been, may be six months ago?

Dan Booth

No, I don’t think that the pricing has changed dramatically. If there was any difference, it would be very modest.

Christian Brown – Deutsche Bank

And what is the purchase process for their other bidders?

Dan Booth

No, actually, the facility had been managed by the now current operator. So, it was that they really just had an option to purchase it which they exercised.

Christian Brown – Deutsche Bank

Okay, and the property that you are planning to sell during Q1, what prompted the sale?

Taylor Pickett

That was a property that was closed during the third quarter and it has been closed and it is on an agreement to be sold.

Christian Brown – Deutsche Bank

Okay, that's it, thanks.

Tom Peterson

Thank you.

Operator

And we'll take our next question today from Jerry Doctrow of Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

Good morning.

Taylor Pickett

Good morning Jerry.

Jerry Doctrow -Stifel Nicolaus

You touched on this little bit, but I wanted, may be from Dan and may be Taylor as well, just get a little bit more kind of color context on acquisition environment. Dan, I think you were to say it in response to the prior question; you don't see yields or cap rates sort of moving much in skilled space. I was wondering if you could just elaborate on that or may be I am inferring the wrong thing and then if you just can give me a little color on kind of what you are seeing out there, how competitive, where you see yields going, all that stuff?

Dan Booth

Yes, Jerry. The environment was particularly choppy in 2007. We are starting to see a little bit more detail, as of ways. It's mostly coming though from our existing operators. They are really the once that are presenting deals to Omega. I am not sure there's a tremendous amount of new activity out there.

Cap rates haven't changed dramatically, if any thing, they might have come down a little bit but I wouldn’t say there has been any dramatic change. I mean obviously the credit markets have tightened up considerably. But we are really not seeing any dramatic change other than we are seeing just a little bit of an increase in activity.

Jerry Doctrow - Stifel Nicolaus

You talked about your existing clients primarily in terms of what's going on out there. The way I think of your existing client base are pretty solid regional operators and so they just continue to gradually grow there, their business. Is that that kind of your sense of what is going on?

Taylor Pickett

Yeah that's exactly what's going on.

Jerry Doctrow - Stifel Nicolaus

Okay and are you out there sort of trying to bring new players in to the fold, or you've got enough deal coming from the existing guys that keeps you happy at the moment?

Dan Booth

When we see a deal that hasn't been brought to us by our operators, we go to them generally first. But we still look at certain sell, lease backs from other operators outside of our portfolio. It hasn't been our bread and butter, I am not sure that it will be in the future. We are looking at a pretty significant amount of deals coming through the door. Many are with operators who are not currently in our portfolio.

Jerry Doctrow - Stifel Nicolaus

Okay and Terry, just may be, if you want add anything else. I think the world, at least the financial world that I live in expects cap to got be going up here, given what's going on in the credit markets or yield have to be going up. Dan is saying they are pretty much flat and skilled nursing. Can you he us understand a little bit better what's going on there.?

Taylor Pickett

I think from our prospective we passed on dozens of deals in 2007 where the implied cap rate or the bed value, however you want to talk about it in our world, just was untouchable and unrealistic from where we sat. Your not seeing those sort of untouchable, unrealistic transactions anymore and so I think to Dan’s comment, the sdtuff we’re looking at, and we’re taking the time to look at, we’re not seeing a lot of movement but a lot of the unrealistic stuff that was flowing through the market, six or nine months ago, you are just not seeing that anymore.

Jerry Doctrow - Stifel Nicolaus

Because that was still being done like CMBS or highly levered or---

Taylor Pickett

Correct.

Jerry Doctrow - Stifel Nicolaus

So the 10% yield is what we should be thinking about and how do you think about per bed numbers; when you say things are just crazy, what’s kind your --

Tom Peterson

Obviously, regionally those number differ pretty dramatically. In the North East you could see bed prices push up 80,000 – 85,000 a bed and that wouldn’t be unrealistic given replacement cost versus Texas where you sort of think 60-65 a bed for replacement cost, and I’ll would compare that to transactions where (inaudible) we saw on one at [Merlyn] it was been trying to priced a 110, is that right?

Dan Booth

Yeah and north., and a lot of that transactions in ’07 with these unrealistic bed values and cap rates, they actually didn’t close. So, specially as we move further along in the year.

Jerry Doctrow - Stifel Nicolaus

So, they are coming back maybe?

Dan Booth

Maybe.

Jerry Doctrow - Stifel Nicolaus

Okay, and just the last thing and then I’ll jump off; we’re seeing some places where there are new developments and there has been some discussion about operators recently that they are really actually looking at shortage of Sniff beds because, the total beds supply continues to fall off. Are you funding much development, obviously it's limited to states where they have CON weaken, you somehow get yourselves at CON, but are you doing much in way of development of new Sniffs?

Bob Stephenson

We've got a little bit ongoing today, its not particularly material but we have (inaudible) in Ohio; we have a Skilled Nursing Facility that is likely to come out of the ground in Texas with in all likely, there are a couple to follow, and that’s not just an adjunct to a broader strategy of spending CapEx for appropriate upgrade facilities with various operators. I think you will continue to see that. But to your point, it will be limited because there are not that many opportunities to build Skilled Nursing facilities in outside of states like Texas.

Jerry Doctrow - Stifel Nicolaus

Okay, and do you have development in some of the CapEx funding included in your guidance as well that also until you commit to a deal or is not in.

Bob Stephenson

It's not in our guidance.

Jerry Doctrow - Stifel Nicolaus

Okay. Alright, thanks guys.

Operator

(Operator Instructions) We'll go next to Charles Place, of Ferris, Baker Watts

Charles Place - Ferris, Baker Watts

Good morning.

Taylor Pickett

Good morning, Charles.

Charles Place - Ferris, Baker Watts

One question I had and Bob you touched on it quickly and I don't know if my pen was writing fast enough and you had referenced a non collectable note receivable.

Bob Stephenson

That was in 2006.

Charles Place - Ferris, Baker Watts

Oh, it was, okay.

Bob Stephenson

We had it for competitive purposes.

Charles Place - Ferris, Baker Watts

Okay, for 2000, the fourth quarter of '07; was there any thing in the G&A line of the 2.4 million that was kind of one time in nature, or was that just a --

Bob Stephenson

As you know G&A fluctuates a little bit. I guess the way you look at it is for '08 guidance so to speak, which should be slightly above 9.5 range and with the assumption of the fact that the first quarter G&A is typically always higher than the second, third, and fourth due to payroll tax timing and funding.

Charles Place - Ferris, Baker Watts

Okay. Obviously you have very little on the way of expiring leases but I did notice that there was one in 2008. Do you expect that to be renewed and how do you expect that rental rate to be relative to the expiring rate?

Dan Booth

We're already in contact with that particularly operator. We do expect to renew that lease. The interest rate of return will stay the same, it will actually marginally go up.

Charles Place - Ferris, Baker Watts

Okay. Bob, you commented a little on the dividend reinvestment plan for the quarter. How many shares were issued under that plan, and after suspending it, has it ramped up to previous levels?

Bob Stephenson

We actually reinstated in November of ‘07 and we did in November and December, a little over 200,000 shares in each of those two periods or $6.5 million. And again in January it was at the same run rate, $3.5 million; $3.3 million of cash to company a little over 200,000 shares and we expect that right now to continue.

Charles Place - Ferris, Baker Watts

200,000 shares per month, roughly $3 million to $3.5 million.

Bob Stephenson

Yeah, we cant predict the market but is what we say, yes.

Charles Place - Ferris, Baker Watts

Okay, great. I think that was it. I guess, I will come forward and ask Taylor, can you [brag in] an acquisition expectation for 2008 just to make sure that we are not overly aggressive on assumption in that area?

Taylor Pickett

I would just go back to a comment I made in to our last quarter call which is, the environment that we see today is very similar to what we saw in 2004, ‘05 and ’06; which were choppy, we will have some big transactions and some smaller transactions. But if you look over that three year timeframe, we rented about $200 million a year. So, without knowing what closed or not closed, I've seen environment that is very similar to that.

Charles Place - Ferris, Baker Watts

Okay, that is very helpful. That’s it for me, thank you.

Dan Booth

Thanks Charles.

Operator

(Operator Instructions) We will go next to [Tahiu Okesanya] of UBS.

Tahiu Okesanya - UBS

Good morning everyone. Two quick questions, in regards to the ability to make acquisitions in 2008, your line of credit capacity is $255 million. You currently have $48 million on it which means you have about $200 million in capacity on the line. But your debt to total cap is close to about 50%, and I know very often what these lines of credit there are some type of limit of how leveraged you can be. Is there any issue with that on your particular line of credit?

Bob Stephenson

Not at all; we're not even close to any of the leveraged covenants with respect to our line of credit.

Tahiu Okesanya - UBS

Could I just ask what the leverage covenants are?

Dan Booth

Our leverage on the bank facility can go up to 5.25 times, more like 3. --

Bob Stephenson

The primary covenant is debt to EBITDA.

Tahiu Okesanya - UBS

Okay.

Bob Stephenson

And that primary covenant cap is 5.25 and we are south of 4 right now

Tahiu Okesanya - UBS

Okay, so debt to EBITDA is 5. Okay, that’s helpful. Thank you.

Bob Stephenson

You are welcome.

Operator

And we’ve no further questions at this time I would like to turn the call back over to Mr. Taylor Pickett for any closing remarks.

Taylor Pickett

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

Operator

And that does conclude today’s conference call. Thank you for your participation. You may disconnect at this time.

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