May 7, 2010
Executives
Michelle Reiber – IR Taylor Pickett – CEO and President Bob Stephenson – CFO Dan Booth – COO
Analysts
Dan Bernstein – Stifel Nicolaus Tayo Okusanya – Jefferies
Operator
Good day, everyone, and welcome to the Omega HealthCare Investors earnings first quarter conference call. At this time, this conference is being recorded.
At this time, for opening remarks and instructions, I would like to turn the call over to 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 conditions 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 to 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, Michelle, and good morning. Adjusted FFO for the first [ph] quarter is $0.38 per share.
We have maintained the common dividend at $0.32 per share, a payout ratio of 84%, which is consistent with our historical policy of an 80% to 85% payout ratio. There are several modest adjustments to get to adjusted FFO.
The adjusted FFO of $0.38 per share for the first quarter reflects the core run rate of the portfolio; that is, the positive effect of the legal settlement offsets the negative arbitrage of holding a significant cash balance and the expected improvement in Formation rent revenue. Turning to the CapitalSource transaction, the third option portfolio is scheduled for closing in June, while the HUD portfolio remains subject to government approval.
Hopefully, we will receive this approval soon, in which case we will close on the HUD portfolio during the second quarter. We have sufficient cash and revolving credit facility availability to close both the option portfolio and the HUD portfolio with no additional capital required.
Turning to FFO guidance, we have increased our quarterly adjusted FFO guidance to a range of $0.43 to $0.46 per share. This run rate is post all of the CapitalSource closings and does not reflect any new equity issuances.
Finally, on the Formation portfolio front, we have signed amended agreements with Formation that, subject to Formation, Genesis achieving budgeted facility cash flow, will modestly reduce our prior contractual rent. The effect of this amendment is included in our quarterly run rate guidance.
Bob Stephenson, our Chief Financial Officer, will now review our first quarter financial results.
Bob Stephenson
Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $33.4 million or $0.38 per share for the quarter, as compared to $33.6 million, or $0.41 per share, in the first quarter of 2009.
Our adjusted FFO was $33.5 million, or $0.38 per share for the quarter, and excludes a settlement with a former operator for breach of contract, net of legal costs and the collection of past due revenue of $1.1 million, $220,000 of acquisition-related expenses, non-cash restricted stock compensation expense of $839,000, and it also excludes the $200,000 net loss 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 revenue and a legal settlement, was $50.6 million versus $44.7 million for the first quarter of 2009, with the increase primarily a result of the December 2009 CapitalSource acquisition. Operating expense for the quarter – for the first quarter of 2010, when excluding nursing home expenses, provisions for impairments, and acquisition-related expenses, increased by $4.3 million as compared to the first quarter of 2009.
This increase was primarily the result of additional depreciation expense associated with approximately $270 million of CapitalSource assets acquired in December 2009. Interest expense for the quarter, but excluding non-cash deferred financing costs, was $13.6 million versus $8.8 million for the same period in 2009.
This increase was due to higher average debt balances on our balance sheet, primarily associated with the following: One, a full quarter of interest on our $100 million 6.5% term loan entered into in December 2009; second, a partial quarter of interest on a $200 million 7.5% bond due 2020 that were issued in February of 2010; and finally, a partial quarter of interest associated with the $59 million of assumed CapitalSource mortgage debt that we paid off in February of 2010. We completed a number of transactions in 2010, which had and will continue to have a significant impact on our balance sheet.
On February 9, 2010, we issued and sold $200 million 7.5% [ph] senior unsecured notes due 2020. Proceeds from the sale of these notes were used to repay all outstanding borrowings on our credit facility and to repay the $59 million of mortgage debt assumed in the CapitalSource 2009 December acquisition.
In 2009, we entered into a $100 million equity shelf program, also known as a continuous equity program. With this program, we can sell shares of our common stock in open market transactions.
During the first quarter of 2010, we sold 1.9 million shares of new common stock under this plan, generating net proceeds of approximately $38 million. On April 6, 2010, we sold 1.7 million shares of our common stock available under the equity shelf program pursuant to a terms agreement with Banc of America-Merrill Lynch, resulting in net proceeds of approximately $32.3 million.
The sale of the 1.7 million shares completed our $100 million equity shelf program. On April 13, 2010, we entered into a new $320 million revolving senior secured credit facility which matures in April 2014.
The 2010 credit facility is priced at LIBOR plus an applicable percentage based on our consolidated leverage and does not have a LIBOR floor. As a result of entering into our 2010 credit facility and terminating our old credit facility, we will record a one-time non-cash charge of approximately $3.5 million related to the write-off of deferred financing costs associated with our old credit facility.
This write-off will be recorded during the second quarter of 2010. At March 31, 2010, we had approximately 1.7 billion of total assets.
On the liability side of the balance sheet, we had $781 million of debt at March 31, 2010, and we had $75 million of invested cash, with 100% of our revolving credit facility available for use. Today we have $120 million in invested cash and all of our $320 million credit facility available for use.
For the three months ended March 31, 2010, our total debt to annualized EBITDA was 3.9 times and our fixed charge coverage ratio was 3.0 times. I will now turn the call over to Dan Booth, our Chief Operating Officer.
Dan Booth
Thanks, Bob, and good morning. As of March 31, 2010, Omega had a core asset portfolio of 293 facilities distributed among 35 third-party operators located within 32 states.
Included in the facility totals are 40 assets acquired from CapitalSource effective December 22nd, 2009. Operator coverage ratios for the Omega portfolio, including the recently acquired CapitalSource assets, remained stable for the fourth quarter of 2009, trailing 12-month operator EBITDARM coverage for the period ended 12/31/09 was two times versus two times for the period ended September 30th, 2009.
Trailing 12-month operator EBITDAR coverage was 1.6 times as of 12/31 versus 1.6 as of 9/30. We anticipate that flat operator revenue, coupled with the current rate of inflation, will provide modest pressure on operator coverage ratios in future quarters.
Turning to acquisitions, as part of the previously announced CapitalSource transaction, Omega expects to close on a separate group of 63 facilities during the second quarter of this year. The portfolio represents over 6,700 beds located in 19 states which are part of 30 in-place leases with 18 separate operators.
In addition to the 40 previously acquired facilities and the 63 additional facilities to be acquired in the second quarter of this year, Omega expects to close on an additional 40 facilities sometime in the second quarter. These 40 facilities have existing HUD mortgages in place, which Omega must assume, and HUD must provide consent prior to closing.
That portfolio of assets represents nearly 5,000 beds located in Florida and Mississippi and is part of 13 in-place leases with two separate operators. In addition to the pending CapitalSource transactions, Omega continues to see a steady increase in potential investment opportunities.
As previously stated, Omega has nearly 120 million in cash on our balance sheet and $320 million in revolving credit capacity in order to potentially take advantage of some of these investment opportunities.
Taylor Pickett
Thanks, Dan. We will now take questions.
Operator
Thank you. (Operator Instructions) Our first question is from Jerry Doctrow with Stifel Nicolaus.
Go ahead, please.
Dan Bernstein – Stifel Nicolaus
Good morning. This is Dan Bernstein filling in for Jerry.
Taylor Pickett
Good morning, Dan.
Dan Bernstein – Stifel Nicolaus
Good morning. I was hoping you could walk through what your capital needs are now a little bit in more detail to close the second tranche and the third tranche, in terms of what debt you are going to assume in both tranches and what you need to pay out.
Taylor Pickett
The – we will assume, in the HUD transaction and the HUD debt, that amount of debt assumption is about $200 million. And then with the option closing, it is 295 million of cash, the HUD closing's $65 million of cash.
So on its face, it's $260 million of cash. I will note that over the last couple of months, we bought some of the mortgage obligations underlying the option portfolio.
We purchased about $14 million of face value at a discount. So in terms of total cash, it will be a little bit less than 250 million.
And as Bob mentioned earlier, we have 320 million of availability and 120 million of cash. So we have $440 million of liquidity and a need of, let's call it 250 million.
Dan Bernstein – Stifel Nicolaus
You have not renewed the equity shelf program as of yet? Is that correct?
Taylor Pickett
We have not. And let me append what I just said.
I did the math in my head quickly. We (inaudible) of 350 million.
So we'll have about $100 million of liquidity post the two closings. I apologize for that.
And the answer to the continuous equity is no, we have not renewed that, although we expect that we will.
Dan Bernstein – Stifel Nicolaus
And do you have any, I guess, thoughts on the use of debt or equity in the future? What mix you would like to deal with?
60/40 or 50/50, and do you see the company increasing leverage at all or maintaining its current capital structure as you make further acquisitions beyond CapitalSource?
Taylor Pickett
50/50 works out pretty well in terms of maintaining four to five times debt to EBITDA leverage. So my expectation, without deciding what the order would be, is over time you'd continue to see us do about 50% equity, 50% debt, typically 10-year type bond debt.
Right now our leverage is expected to be in the high 4's post the closings, right, Bob?
Bob Stephenson
That's correct. We're at 3.9 now, and that will go up to the high 4's with no additional equity.
Taylor Pickett
So, let’s say 4.8. As Dan mentioned, the pipeline's pretty active, so we have some liquidity for some of the transactions we're seeing, but the expectation would be if that activity continues to pick up, we'll be back in the markets.
Dan Bernstein – Stifel Nicolaus
And on the acquisition front, are your expectations for, based on what you're seeing in the pipeline, that you could do another 200 million annual, what you have done in the past, or is it some number higher? And maybe what is – what do you think is prompting the increase in the pipeline?
And then just last, can you comment on what cap rates are you seeing? Are those any different than what you've been doing and seeing in the past?
Taylor Pickett
I'll ask Dan to take that one.
Dan Booth
Yeah, I mean, Dan, we see cap rates all over the board. We're going to focus on those transactions that give us our 10 plus percent returns.
So that's what we hone in on. Where they start is sometimes a different starting place.
But certainly there has been an increase in opportunities where I've seen more and more deals. I'm not really sure what the catalyst is for that, to be honest with you.
I do know that there's not a tremendous amount of competition out there at this point in time, at least that we're seeing. And what was the other piece of your question?
Dan Bernstein – Stifel Nicolaus
It was about the pace. You know, is 200 or more–?
Dan Booth
Once again, our history has been choppy in terms of acquisitions, given annually and/or quarter over quarter. So it's hard to sort of pin that down.
But I would say, from where I sit today, that 200 annually is not a bad number.
Taylor Pickett
Yeah, I think, just to add to that, if we think about the pipeline we have seen in the past where we averaged 200 or 250 million, and we look at the pipeline today, it sure feels like, that we are at that level or maybe a little bit better in terms of the opportunity. Whether we bring them across the finish line or not remains to be seen.
Dan Bernstein – Stifel Nicolaus
And are these opportunities with new operators or existing operators?
Taylor Pickett
A combination. We're seeing some new and some existing.
Dan Bernstein – Stifel Nicolaus
Okay.
Dan Bernstein – Stifel Nicolaus
I don't have any more questions at this time. Thank you.
Taylor Pickett
Okay.
Operator
Thank you. Our next question is from Tayo Okusanya with Jefferies.
Go ahead, please.
Tayo Okusanya – Jefferies
A quick question. The Phase 2 of the CapitalSource deal, any particular thing that seems to be holding up the HUD financing?
Bob Stephenson
That's a loaded question, Tayo. Yeah, we do need government consent, and that's what we're waiting on.
Dan Booth
But I think, that being said, there's a process that we're in the middle of, and there's a corporate credit review process, then what's the–?
Bob Stephenson
And then there's transfer of physical assets. And I think we're further past than just the middle of it.
I hope we're sort of on the back end of this process. But it has been long.
It was longer than anybody had ever given us indications of. But we are moving through the process.
It just involves an enormous amount of paper being pushed back and forth, a lot of different people within HUD having to check boxes and look over the stuff.
Taylor Pickett
So I think the important aspect is it's not a, you know, send the paper in and get back an approval. There's been a lot of dialogue back and forth.
We feel like we've gotten at least 450% of the way there, and probably even more than that. It's just we can't predict with any certainty when we'll have the final thumbs-up to go forward.
Tayo Okusanya – Jefferies
Okay, that's helpful. And then could you talk a little bit about the situation on the Formation/Genesis side?
Taylor Pickett
Sure. We have amended that agreement, and as part of that amendment from an accounting perspective, we've gone on a cash basis with those assets.
And in the first quarter, they performed okay at that, although we've seen some improvement. And we would expect in the second quarter that that's going to show up, not only in their cash flows, but in our rent.
And so previously we talked about contractual rent from that entire portfolio, a little bit north of $12 million, the revised contractual rent is a little bit more than $9 million, although that – we may receive a little bit more related to the Connecticut assets, even when those are transitioned. All that being said, in the first quarter basis – we were on a cash basis and did not perform at that level, where we expected that we will.
Tayo Okusanya – Jefferies
So the difference, now, is you had a contractual rent of 12 million and now it's 9 million?
Taylor Pickett
It is 9 million plus whatever rent we receive on the Connecticut assets due to the transition.
Tayo Okusanya – Jefferies
Plus whatever you get on Connecticut – so that's the adjustment you were talking about, which you factored into your FFO projections on a going-forward basis? That difference between the 12 and the 9?
Taylor Pickett
That's correct.
Tayo Okusanya – Jefferies
Okay, got it. That's helpful.
And then also the recent change of tenants on the Emerald?
Taylor Pickett
Yes. We, those Florida facility assets were run by Advocate, and Advocate was one of the only public companies that has any presence in Florida at all in the skilled nursing facility industry, and that really was their presence in Florida.
So we mutually agreed with Advocate that it made sense to transition those assets. We transitioned them to a major Florida operator and crossed those assets into a bigger relationship.
And the contractual revenue we were receiving from those assets didn't change.
Tayo Okusanya – Jefferies
Okay. Got it.
But why was there a need for you to move those assets from a foreclosure perspective before you could get Advocate out of there? Were the assets underperforming under Advocate's care?
Taylor Pickett
No. Without belaboring it too much, long ago, pre our time here, for whatever reason, the transaction was set up in a structure where there was an individual who owned the property and had a mortgage with Omega, essentially a straw man who then leased to Advocate.
In order for us to move the properties, we had to eliminate the straw man via foreclosure.
Tayo Okusanya – Jefferies
Okay.
Taylor Pickett
In order for us to move the properties, we had to eliminate the straw man via foreclosure.
Tayo Okusanya – Jefferies
Got it.
Bob Stephenson
And that was all done consensually.
Tayo Okusanya – Jefferies
Okay. Understood.
That's it for me. Thank you.
Taylor Pickett
Thanks, Tayo.
Operator
Thank you. (Operator Instructions) I'm showing no further questions.
I would now like to turn the conference back over to Mr. Taylor Pickett.
Taylor Pickett
Thank you. Thank you for joining our first quarter earnings release call.
Bob Stephenson, our CFO, will be available for any follow-up questions.
Operator
Ladies and gentlemen, thank you for your participation. That concludes the conference.
You may disconnect, and have a wonderful day.