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Executives

Michele Reber - IR

Taylor Pickett - CEO

Bob Stephenson - CFO

Dan Booth - COO

Analysts

John Roberts - Hilliard Lyons

Rob Mains - Stifel Nicolaus

Lee Brown - Visium

Jeremy Metz - Deutsche Bank

Omega Healthcare Investors, Inc. (OHI) Q3 2012 Earnings Call October 26, 2012 10:00 AM ET

Operator

Good morning and welcome to the Omega Healthcare Investors Incorporated Third Quarter Earnings Call for 2012. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would 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 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, FAD, and 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.

Taylor Pickett

Thanks, Michele. Good morning and thank you for joining Omega's third quarter 2012 earnings conference call. Adjusted FFO for the third quarter is $0.54 per share; a 13% increase from the third quarter 2011 adjusted FFO of $0.48 per share.

Normalized funds available for distribution, FAD, for the quarter is $0.47 per share. We anticipate fourth quarter adjusted FFO to be $0.54 to $0.56 per share and FAD of $0.49 to $0.50 per share.

We increased our quarterly common dividend to $0.44 per share. This is 4.8% increase from the last quarter, and a 10% increase from the third quarter 2011. The dividend payout ratio was 81% of adjusted FFO. We've increased our 2012 adjusted FFO guidance to a revised range of $2.15 to $2.17 per share. Through September 30th, we have made new investments of $258 million. The acquisition pipeline continues to be active.

Bob will now review our third quarter financial results.

Bob Stephenson

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $56.7 million or $0.52 per share for the quarter as compared to $44.5 million or $0.43 per share in the same quarter of 2011. Our adjusted FFO was $58.7 million or $0.54 per share for the quarter, and excludes $1.5 million of non-cash stock-based compensation expense and $483,000 of expenses related to the closing of new investments. Further information regarding the calculation of FFO is included in our earnings release and on our website.

Operating revenue for the quarter was $87.1 million versus $72.8 million for the third quarter of 2011. The increase was primarily a result of $9.5 million of incremental lease revenue from a combination of acquisitions completed since September 2011, capital improvements made to our facilities throughout 2011 and '12, and lease amendments made during that same time period.

$4.1 million of mortgage interest from new mortgages originated in late 2011 and $900,000 of other investment income related to a new originated in December of 2011.

The $87.1 million of revenues for the quarter includes approximately $7.9 million of non-cash revenue. We expect that non-cash revenue component to decrease by approximately $1.5 million in the fourth quarter.

Operating expense for the third quarter of 2012, when excluding nursing home expenses, acquisition related costs, and stock-based compensation expense, increased by $4.2 million as compared to the third quarter of 2011. The increase was primarily a result of $3.4 million in depreciation and amortization expenses related to the closing of approximately $575 million of new investments since October 1st, 2011.

From a G&A standpoint, we project our 2012 annual G&A expense to be just under $15 million, assuming no extraordinary transaction or unusual events.

Interest expense for the quarter, when excluding refinancing cost, and non-taxed deferred financing cost, was $24 million versus $20 million for the same period in 2011. The $4 million increase in interest expense resulted from higher debt balances associated with financings related to the new investments competed since October 1st, 2011.

Turning to the balance sheet for the year. On June 29, 2012, we paid $11.8 million to retire four mortgage loans guaranteed by HUD. The loans were assumed as part of the December 2011 purchase of 17 SNF and had a blended interest rate of 6.49%. The payoff resulted in a $1.7 million gain on the early extinguishment of the fair market value of debt recorded in the second quarter of 2012. During the third quarter we sold one held-for-sale facility for total cash proceeds of $2.3 million and recorded a $1.7 million accounting gain.

In March, we issued and sold $400 million of 5.875% senior, secured, or unsecured excuse me, notes due 2024. Proceeds from that offering were used to tender and redeem our $175 million 7% bonds due 2016 with the balance used to payoff credit facility debt.

For the nine months period ended September 30, 2012, under our Equity Shelf Programs and our dividend, reinvestment and common stock purchase plan, we issued a combined 8.2 million shares of our common stock, generating net cash proceeds of $186 million at an average price of approximately $22.70 per share.

For the three-months ended September 30th, 2012, our funded debt to total asset value ratio was 48%, which is well within the maximum of 60%. Our funded debt to adjusted annualized EBITDA was 4.5 times and our adjusted fixed charge coverage ratio was 3.5 times.

I will now turn the call over to Dan.

Dan Booth

Thanks Bob, and good morning. As of September 30th, 2012, Omega had a core asset portfolio of 460 facilities, distributed among 47 third-party operators, located within 33 states. Operator coverage ratios dropped off as expected during the second quarter of 2012. However, trailing 12 months operator coverages were only modestly affected.

Trailing 12 months operator EBITDARM coverage was 2 times for the period ended June 30th, compared to 2.1 times for the period ended March 31st, 2012. Trailing 12 months operator EBITDAR coverage for the period ended June 30th, was 1.6 times, compared to 1.7 times for the period ended March 31st, 2012.

As discussed previously, this drop in overall operator coverages, is an expected temporary trend, as previous quarters, better saying from RUG-IV drop off and are replaced by results, which are affected by the 11.1% Medicare rate cuts. All we expect this trend to continue for the third quarter. We ultimately expect overall operator coverages to remain strong and comparable to historical coverage ratios pre-RUGIV implementation.

Turning to new acquisitions. In the third quarter, we purchased an investment with one of our current operators. We completed investment with one of our current operators. On August 31st, 2012, Omega purchased 27 facilities, which included 5 campus locations in Indiana for $206 million. The 27 facilities were added to an existing master lease with the Health and Hospital Corporation of Marion County. The 27 facilities consists of 2310 STEP bed, 323 out beds, and 259 independent living garden apartments and generating initial cash rent of $22.6 million.

Year-to-date Omega has completed $258 million in new investments with a combined cumulative return in excess of 10%, including capital expenditures. While, it's difficult to predict the timing of transaction closures, we currently have a robust pipeline. We currently have $375 million of our revolver available for new investments.

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) The first question comes from John Roberts of Hilliard Lyons. Please go ahead.

John Roberts - Hilliard Lyons

Did you offer any, I -- I may have missed this but did you offer any financial matrix in the health and hospital acquisition, GAAP rates et cetera?

Taylor Pickett

Well, we mentioned that the initial cash yield is $22.6 million on a $206 million purchase price that includes a little bit of a land. So you're talking about 11% returns.

John Roberts - Hilliard Lyons

11%, okay. And are there bumps on that?

Taylor Pickett

There are 2% bumps.

John Roberts - Hilliard Lyons

Annual?

Taylor Pickett

Annual.

John Roberts - Hilliard Lyons

And for how long?

Taylor Pickett

Through the term of the lease, which is 10 years.

John Roberts - Hilliard Lyons

10 years, right. Okay. Thank you.

Operator

(Operator Instructions) The next question comes from Rob Mains of Stifel Nicolaus. Please go ahead.

Rob Mains - Stifel Nicolaus

You mentioned HUD in the prepared commentary I know that they've been, kind of giving away money it seems. I think as how to merge this sort of a competitor in terms of capital source for operators are used to mostly seeing other rates private equity that sort of folks out there?

Taylor Pickett

I think HUD to some degree those have been our competitor. It just depends on, we provide obviously 100% financing whereas HUD provides something significantly less whether it's 70% or otherwise. So it's a -- the major concern is a little bit different when people are out shopping for deals in money.

Rob Mains - Stifel Nicolaus

And when you look at your capital structure I mean, I've heard of close to 3% rates that are out there. How do you kind of weigh that against that the rating agencies don't like secured debt?

Taylor Pickett

Rob, we tended to keep the secured debt down to a percentage that the rating agencies can live with and we basically said we want to be under 20% and where are we Bob?

Bob Stephenson

About 14%.

Taylor Pickett

14%. So it's a little bit of a balancing act and frankly, we, because we're a qualified HUD lender if there are assets out there that have HUD debt that would need to be assumed because of lockouts or otherwise it puts us in a competitive advantage to leave ourselves rooms to do those type of deals. So, where you see us add HUD, in all likelihood you will, and it will be part of a transaction structure.

Rob Mains - Stifel Nicolaus

And can you just talk about whatever you can about the size of the pipeline? How far that -- because it seems that with some of your peers now not doing sniff deals so it would seem that, do you -- your pipeline of least available opportunities must be growing?

Taylor Pickett

The pipeline is active and we said that throughout this year and we comment that we are confident on that in our guidance of $150 million and we see a similar pipeline today that we saw throughout the year. So without getting into specifics of numbers and timing, it's still active and it's still the same as it's been throughout the year and obviously we've exceeded our projection for the year to date.

Operator

The next question comes from Lee Brown of Visium. Please go ahead.

Lee Brown - Visium

Just a quick question on operator coverage. If you were to annualize it just for the latest quarter, so instead of looking on an LTN basis for that 1.6 times coverage after fees, where does that change to?

Bob Stephenson

We report on trailing twelve months historically, and so there's so much choppiness in any given quarter that we don't isolate down to the quarter. We think that the trend has basically flattened out at this point. So we don't see it going much below the 1.6 trailing 12 months that we have today.

Lee Brown - Visium

And just one quick follow up. In terms of the top operators there that we break out prior to this 37, what's -- without naming this specific entity, what's the lowest coverage ratio on a trailing 12 months basis?

Bob Stephenson

All of those operators that -- we've talked about this before, we stratified, they're all above 1.25 except for one. There's one operator who has purposely spent money in a state to make some changes that will affect our future rates. So frankly on a pro forma basis we're looking at north of 1.25 throughout that top ten.

Operator

(Operator Instructions) Seeing that there are no other questions, this concludes our question and answer session. I would like to -- just one moment. We have a question from Jeremy Metz of Deutsche Bank. Please go ahead.

Jeremy Metz - Deutsche Bank

I just want to get you talk a little bit more about the deal you did complete this quarter, just a little more detail to how long that has been in the works? Are there other such opportunities where some of your existing operators out there to do such deals going-forward?

Taylor Pickett

Yeah. The deal that we just did was with an entity that we had already had leases with. We were familiar with them and it had been in the works for a number of months. And then, most of our deals, as we above had said, are coming from our existing portfolio. So, while we have a number of deals in the pipeline right now, it's a little bit of a mixed bag we have got from our existing tenant relationships and some that are quite frankly brand new to the portfolio.

Jeremy Metz - Deutsche Bank

Okay. And it is part of that deal you bought a land parcel. Can you just talk a little bit about that and what your thoughts are with that piece of land and what you could build on it? And do you have any expectations to build there?

Taylor Pickett

The purchase of the properties was $203 million. There was an underlying land lease on one of the facilities that we negotiated just under $3 million and we purchased that, so it has already got an existing facility on it. We just want to get rid of the land lease.

Jeremy Metz - Deutsche Bank

And then, just going back more generally, thinking about the investment markets, talking about an active pipeline, as we're starting to get with reimbursement cuts kind of working themselves through and the market is seemingly opening up a little bit more. Just your thoughts on what you are seeing out there in terms of cap rates, have they moved at all? Where everything is trading at today, and how is competition out there right now for what is available?

Taylor Pickett

I think that cap rates are -- even though we have got some ups and down in the reimbursement, this still stayed pretty consistent, so I have not seen any big movements, we have not rally moved off our returned requirements.

As far as just overall competitive nature, I mean, there is -- some of the smaller rates are still doing sniff deals despite what they might or might not say. And so, we are seeing them out there. And then, there is some private money that is doing some deals as well, and those are our primary competitors.

Jeremy Metz - Deutsche Bank

And then, just one final question, just the ATM and DRIP activity picked up a little bit this quarter. Is that something you expect to continue? Looked like it was a little bit more than maybe some previous quarters, so is that something you are just going to opportunistically look at or is that really a deal related this quarter?

Bob Stephenson

I think it is really a combination of being a little bit opportunistic. And the deals -- but frankly our current leverage levels need to go aggressively with those programs. So, I think future sales are going to be much more deal driven.

Operator

And at this time, I would like to turn the conference back over to Taylor Pickett for any closing remarks.

Taylor Pickett

Thank you for joining the call. Bob will be available for follow-up questions.

Operator

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

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