Omega Healthcare Investors Inc. Q2 2010 Earnings Call Transcript

Omega Healthcare Investors Inc. Q2 2010 Earnings Call Transcript
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Omega Healthcare Investors Inc. (OHI)

Q2 2010 Earnings Call

August 5, 2010 10:00 AM ET

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

Presentation

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

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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.

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