This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk06: Greetings, and welcome to the Omega Healthcare Investors second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After today's presentation, there will be a brief question and answer session. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Michelle Reber. Thank you. You may begin.
spk00: Thank you and good morning. With me today is Omega's CEO, Taylor Pickett, COO, Dan Booth, CFO, Bob Stevenson, and Megan Krull, Senior Vice President of Operations. Comments made during this conference call that are not historical facts may be forward-looking statements, such as statements regarding our financial projections, potential transactions, operator prospects, and outlook generally. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC. During the call today, we well referred to some non-GAAP financial measures, such as NAVRED FFO, adjusted FFO, FAD, and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under generally accepted accounting principles are available in the quarterly supplement. In addition, Certain operator coverage and financial information that we discuss is based on data provided by our operators that has not been independently verified by Omega. I will now turn the call over to Taylor.
spk03: Thanks, Michelle. Good morning, and thank you for joining our second quarter 2024 earnings conference call. Today, I will discuss our second quarter financial results and certain key operating trends. Second quarter FAD funds available for distribution of 68 cents per share was better than expected and should continue to improve as several portfolios are in the process of being transitioned, which will result in FAD upside over the next few quarters. Our dividend payout ratio is now below 100%. and should continue to drop into the mid-90% range in the upcoming quarters. As a result of year-to-date portfolio transitions and acquisitions, we have narrowed and increased our 2024 AFFO guidance to a range of $2.78 per share and $2.84 per share. We have issued a significant amount of equity to fund our robust pipeline, which has helped to further de-lever the balance sheet. As Dan will discuss, key tenant occupancy and rent coverage metrics continue to improve. The under one times EBITDA coverage operator metric dropped to 8.9% of total rent. In looking at the 8.9% balance of below one times operators, we can break the 8.9% into two buckets. Operators representing 6.1% of the 8.9% are strong credits and therefore payment of rent should not be an issue. That leaves operators representing 2.8%, consisting of eight small relationships. On July 24th, we, as the 49% minority partner in a real estate joint venture, closed on the acquisition of the remaining 51% joint venture interest. We now own a 100% interest in the 63 UK facilities previously owned by the joint venture. The acquisition included the assumption of $243 million in secured debt. It is our intention to repay the secured debt in November 2025 as prepayment of the debt prior to November of 2025 will result in significant prepayment penalties. The interest rate of 10.38% on the assumed debt is significantly above omega debt market rates. For GAAP accounting purposes, the above market portion of the interest expense is capitalized as part of the joint venture acquisition. We intend to use this same gap accounting treatment for our FFO, adjusted FFO, and FAD calculations. Lastly, after more than four years of COVID-related industry issues, the industry has generally recovered to pre-COVID operating metrics. The combination of strong demographics and limited or no new supply should bode well for our operating partners. I will now turn the call over to Bob.
spk08: Thanks, Taylor, and good morning. Turning to our financials for the second quarter, revenue for the second quarter was $253 million compared to $250 million for the second quarter of 2023. The year-over-year increase is primarily the result of the timing and impact of operator restructurings, transitions, and revenue from new investments completed throughout 2023 and 2024, partially offset by asset sales completed during that same time period. Our NAE REIT FFO for the second quarter was $189 million or 72 cents per share as compared to $155 million or 63 cents per share for the second quarter of 2023. Our adjusted FFO was $185 million or 71 cents per share for the quarter, and our FAD was $177 million, or 68 cents per share, and both exclude several items outlined in our NAREIT FFO, Adjusted FFO, and FAD Reconciliations to Net Income found in our earnings release, as well as our second quarter financial supplemental posted to our website. Our second quarter FAD was 2.3 cents greater than our first quarter FAD. As outlined in our press release, the Guardian portfolio did not pay in Q1 and was transitioned to a new operator in April, with an annual base rent of $5.5 million and additional annual rent up to $6.9 million based on the new operator's revenue. In the second quarter, we received rental income of $2.8 million from the new operator, which consisted of $1.3 million of base minimum rent and $1.5 million of incremental rent. Turning to LeVie, they paid an additional $1.5 million in the second quarter as their rent payment increased from $1.5 million per month to $3 million per month starting in June. And lastly, Maplewood paid $11.8 million in rent in the second quarter versus $11.3 million in the first quarter. In July, Maplewood paid $4 million in rent Our balance sheet continues to remain strong. On April 1st, we repaid our maturing $400 million senior unsecured bond using $360 million of balance sheet cash, April 1st rent collections, and borrowed the balance from the credit facility. In the second quarter, we completed $221 million in new investments, excluding CapEx, and funded the investments through the issuance of 7.6 million shares of common stock or $245 million in equity proceeds under our ATM program. We ended the quarter with over $35 million in cash on the balance sheet and over $1.4 billion in credit facility borrowing capacity. At June 30th, 99% of our $4.7 billion in debt was at fixed rates. Our net funded debt to annualize adjusted EBITDA was 4.76 times down from 5.0 times in the first quarter, and our fixed charge coverage ratio was 4.3 times. Turning to guidance, as Taylor mentioned, we increased our full year adjusted FFO guidance to a range between $2.78 to $2.84 per share. A few of the key assumptions are we're assuming no change in our revenue related to operators on an accrual basis of revenue recognition. We're assuming LeVie continues to pay at the existing rate of $3 million per month and Maplewood's ability to pay contractual rent continues to improve. We're assuming the new operator of the Guardian Transition Facilities will continue to pay rent of $2.8 million per quarter consistent with the second quarter. We're assuming $77 million in asset sales in the second half of the year related to facilities classified as assets held for sale at the end of the second quarter, for which we recorded $1.4 million in revenue in the second quarter. We've included the annual impact of the 2024 investments and assumed debt completed through July 31st, as outlined in the press release. We project our quarterly G&A expense to continue to run between $11.5 to $13.5 million per quarter. We assume no material changes in market interest rates as they relate to either interest earned on our balance sheet cash or interest expense charged on credit facility borrowings. Additionally, our $245 million in ATM proceeds in the second quarter were raised through equity predominantly issued in June. As such, the 7.6 million shares issued only had a weighted average diluted impact of 2.3 million shares in the second quarter. Had all the shares been included within the weighted average, adjusted FFO would have been diluted by approximately one cent. Our weighted average shares for the third quarter will include the full impact of the 7.6 million shares plus any additional shares issued as we continue to fund new investments accretively with equity while maintaining leverage under five times. As a reminder, for every 4 million shares issued, Our quarterly adjusted FFO is negatively impacted by approximately $0.01 per share until the cash is put back to work in new investments. Our 2024 adjusted FFO guidance does not include any additional investments or asset sales as well as any additional capital transactions other than what has already been mentioned. I will now turn the call over to Dan.
spk14: Thanks, Bob, and good morning, everyone. As of June 30th, 2024, Omega had an operating asset portfolio of 900 facilities with approximately 86,000 operating beds. These facilities were spread across 77 third-party operators and located within 42 states in the United Kingdom. Currently 12-month operator EBITDA coverage for our core portfolio as of March 31st, 2024, increased to 1.42 times versus 1.33 times for the trailing 12-month period ended December 31st of 2023. Occupancy for our overall core portfolio has continued to recover from a low of 74.6% in January of 2022 to 80.8% as of mid-July 2024 based upon preliminary reporting from our operators. Turning to portfolio matters. As previously announced, LeVie filed for Chapter 11 bankruptcy protection on June 2nd of 2024 in the Northern District of Georgia. Omega believes this filing was a necessary and important step in creating an entity that is operationally solvent and sustainable with enhanced liquidity and a strengthened balance sheet. We continue to believe that there is meaningful value in our portfolio of current LeVie assets. Omega has been working with LaVie for over a year to assist it in reducing its continued exposure to underperforming assets, which in turn has alleviated some of the financial burdens on the current LaVie portfolio. We believe the current cash flow generated by our remaining LaVie portfolio is sustainable and will support long-term annualized rent of approximately $36 million, while also retaining sufficient cash within the business to provide for strong clinical care. LaVie paid approximately $3 million in rent in the months of June, July, and August of 2024. Although the bankruptcy proceedings are still in process, Omega anticipates that the final resolution will be concluded prior to year end of 2024. In addition to the aforementioned restructurings, Omega is working with several other relatively small operators on various restructurings. Turning to new investments, During the second quarter of 2024, Omega completed the total of $254 million in new investments, inclusive of $33 million in CapEx investments. The new investments have a weighted average cash yield of 10.4%, with annual escalators ranging from 2% to 2.5%, and include the following. The $62.7 million sale leaseback transaction, whereby Omega acquired 32 care homes in the U.K., and leased these facilities back to a new operator, a $31 million sale leaseback transaction whereby Omega acquired one facility in Michigan and leased it back to an existing operator, a $21 million sale leaseback transaction where Omega acquired one facility in Louisiana and leased it back to a new operator, and four separate loans to existing operators totaling $106 million. Subsequent to the second quarter of 2024, Omega closed on $373 million in new investments, excluding CapEx. These investments include the aforementioned buyout of our 51% JV partner in 63 care homes in the UK. The facilities are leased to two established UK operators with current annual rent of $43.6 million. Omega's total investment is now $436 million, which results in a gross return of 10%. Year to date through July, Omega has closed on $702 million in new investments, inclusive of CapEx investments, through the second quarter. I will now turn the call over to Megan.
spk05: Thanks, Dan, and good morning, everyone. As discussed last quarter, the staffing mandate was finalized in April, despite the inability of most facilities to meet the requirements, and with limited visibility into the structural implication from a labor perspective. in terms of how to create access to the level of staffing required of the mandate. While it is unlikely that any of the levers, legislative or otherwise, to adjust or overturn the rule would be successful prior to the election, it is important to note that as previously expected, certain industry associations along with several operators have filed a lawsuit to overturn the mandate. Although it will take some time for the outcome of the lawsuit to be determined, Both the Supreme Court's recent move to overturn the Chevron Doctrine, which gave deference to regulatory bodies in interpreting laws, and the fact that the attorney who successfully argued for Chevron to be overturned is the same as being used in the case against the mandate, certainly appeared a way in favor of the ultimate success of the lawsuit against the staffing mandate. The fundamentals of the business continue to improve. While not at pre-pandemic levels, occupancy has stabilized and the recovery from a coverage perspective is indicative of the fact that many states have and continue to step up in meaningful ways to provide the support necessary in recovery efforts. We hope they do the same in the face of any and all regulatory pressures going forward. CMS, as well, issued its final 2025 payment rule this week, resulting in a net increase of 4.2% or approximately $1.4 billion, which is slightly better than the 4.1% provided for in the proposed rule. This included a 3% market basket increase plus a 1.7% market basket forecast error adjustment offset by a 0.5% productivity adjustment. So while there continues to be and likely always will be some level of pressure on the industry from a regulatory perspective, hopefully cooler heads will always prevail and the ultimate scrutiny will be well balanced and achieve a level of reasonableness indicative of an understanding of the industry as a whole. I will now open the call up for questions.
spk06: Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit your questions to one question and one follow-up to allow time for as many questions as possible. Our first question is coming from the line of Jonathan Hughes with Raymond James. Please proceed.
spk15: Hi, good morning. Thank you for the prepared remarks and commentary. I was hoping you could share some details of what the investment pipeline looks like today in terms of size, yields, skilled nursing versus assisted living, and then acquisitions versus loans?
spk14: Sure. As we indicated last quarter, it remains today, our pipeline is very active. We're seeing a lot of deals both here in the States and over in the UK. Our average yield is a little north of 10%, which is consistent with what we're seeing in the market. You know, if you compare that, you know what, as we indicated on the call, we did just over $700 million of deals through July of 2024. If you compare that to last year, we had done just over 300 million of deals through the same time period. So we've more than doubled that. Um, and once again, that's just a result of a very active pipeline.
spk15: Okay. Are you seeing, you know, any more private capital competitors come back to the space or are they still largely on the sidelines? you know, due to the challenging bank lending environment.
spk14: So we haven't seen them. So if they've come back, we're not seeing them in any material form.
spk15: Okay. And then just one more from me for Bob. The equity raised via the ATM in the quarter, I think it was the most since second quarter last year, and obviously is an incredible source of capital to fund acquisitions and leverages now. You know, sub-five times, there's plenty of capacity on the revolver. I'm hoping you could just talk more about how you think of funding investment activity going forward and early thoughts on addressing the 2025 debt maturities. Thanks.
spk08: Absolutely. I think your first statement hit it, that we could do all acquisitions and creatively using equity right now, and we want to continue to do that to maintain our leverage less than five times. So I would look, you know, looking forward, we'll continue to do that.
spk15: And then just thoughts on the maturities for next year.
spk08: Yeah, we have $400 million coming up on January 15th, and we'll get in front of that similar to the way we got in front of our $400 million that we just paid off in April. So in the fourth quarter, we'll sit down and look at the market to see whether it's bomb for bomb, but more likely it would be equity.
spk02: Thanks for the time.
spk06: Thank you. Our next question is coming from the line of Michael Griffin with Citi. Pleased to see with your question.
spk12: I'm wondering if you could give some more color just on the buyout of your partner's stake in the Simcox Joint Venture. You know, can you give us a sense, were there any capital or liquidity constraints that your partner had, might have been wanting to, you know, for them to sell their stake, kind of the driving force behind that? and then you quoted the interest rate on it. If you were to re-buy it, I guess when the debt comes due next year, how much benefit from the accretion do you think you'd get?
spk03: Michael, you're coming out. It was a little bit difficult to hear you, but I think I got your question. The relationship within the JV, when we first set it up, we had buy-sell provisions. And we just felt like the timing was good from a market perspective to trigger that. The 51% partner had the opportunity to match the bid and take us out, and they elected not to do so. We thought we got it at a really attractive price when you look at 10% yields ultimately on that asset. Unfortunately, it came with a piece of paper that's not all that attractive. Our cost of capital, debt capital, would be about 6%. So you look at the differential there, it's 4.38% on $243 million. I mean, that's essentially the pickup with the refi.
spk12: Great. Appreciate the color there, Taylor. And then just on the Guardian portfolio, I just wanted to get a sense, is there something that the new operator – is doing differently that Guardian wasn't. I thought Pennsylvania was a relatively tough state to operate in, but any color you have there would be helpful.
spk14: I'm not sure I heard all that question. The facilities in Pennsylvania were struggling, I can tell you that. We moved them in the second quarter. We set up kind of a unique rent structure. that had basically a revenue kicker embedded in it. If the operator performed well, which they did, the kicker, if you will, kicked in in the second quarter, we were able to receive the higher rent, and we expect that to go forward through the remainder of the year.
spk12: Great. That's it for me. Thanks for the time.
spk06: Thank you. Our next question is coming from Jamie Feldman with Wells Fargo. Please proceed with your question.
spk13: Great. Thanks for taking the question. I guess just starting, you have a decent number of mortgage and other real estate-backed investments maturing in 24 and 25. Can you talk about the plans for those and the opportunity to put that capital to work at a similar rate or how you think that plays out for earnings?
spk14: So, you know, we've got, they're kind of onesie mortgages that are coming due over the course of the next, call it 12 months. No one in particular is that material. We expect some of those to pay off and we expect some of those to be extended. I don't think we're going to see a lot of dollars rolling back, but yeah, they were short-term mortgage loans for the most part. A little mess sprinkled in there.
spk13: Okay. I mean, do you think it ends, you think like, I guess, It's obviously in 24, but for 25, you think it's neutral to earnings?
spk14: Or you can... Yeah, it shouldn't have any material impact at all on earnings.
spk13: Okay. And then it looks like the investment environment's been pretty favorable this year. Can you talk about what you're seeing more in, particularly in the UK, where it seems like you've had more opportunities recently? How much do you think you might put to work there and what the opportunities that looks like going forward?
spk14: You know, both the states and the UK is quite active right now. I think what we have going for us in the UK is that there's not as many capital players over there just yet. I mean, they had a quicker recovery overall from COVID, so we got in there pretty quick, and we haven't seen a lot of capital players come into that market yet, so we're able to pick and choose, and we are being opportunistic at this point in the UK, looking at really kind of all facets of ARAMS.
spk13: How would you frame the magnitude of the investment opportunity?
spk03: I would think about the pipeline. The pipeline that created the opportunities that we've seen the first seven months of this year hasn't changed. So you never can predict when stuff's going to come through, but it's a similar pipeline. in terms of the opportunity set that we're seeing.
spk13: Okay, and then finally, can you just give an update on the Second Avenue Maplewood project? What are your thoughts on lease-up, how you think that develops into the back half of 24 and early 25?
spk03: Yeah, so Second Avenue continues to ramp up in a market where there's a lot of new product. I mean, we were the first in, but there's three buildings that followed us in Manhattan, and we're doing well, 67% occupied, and we'll continue to trend up. But remember also the building has matured, so you have residents that pass away and are being backfilled with new residents. So I'm not sure. It's tough to predict when we get to 90%, but there's certainly a pathway, and they continue to do well.
spk13: Okay. All right. Thank you for your thoughts.
spk06: Thank you. The next question is coming from the line of Vikram Malhotra with Mizuho. Please proceed with your question.
spk01: Good morning. Thanks for taking the question. I just wondered if you could expand on the Maplewood point and maybe just also give us an update just on DC. Just in New York, it seems like you said there's a lot of competition, maybe some discounting, lease-ups a bit slower. Any statistics you can share, like I think you did at Nereid, you gave us some statistics on move-in, move-out sort of occupancy. Just what are you anticipating for the lease-up to sort of a run rate where you can get full rent?
spk03: Yeah, timing is impossible to predict. But I will say this, there has been As you mentioned, there's been some discounting of product in Manhattan. Fortunately, there's not so much price sensitivity in Manhattan. If a property is desirable, you can pretty much hold prices. So you think about Second Avenue, which has 120 residents. So it's a vibrant community already. It shows very well. The care is exceptional. And that's why we're able to get rev pour of $22,000 a month. So I think we have everything headed the right direction. But to answer the question of when 67% get to 90%, not this year, probably. You're looking at 25%. And then just to close the loop on Maplewood, there were really three key things for us with that team. One is transitioning operations out of the Greg Smith estate. One was stabilizing that operating balance sheet. And the last is the ramp up of Second Avenue. The balance sheet's been stabilized. The transition of operations is in process. And the ramp up's on its way. The rest of that core portfolio, the other 16 facilities, do incredibly well. So you have this solid base that fully supports the current rent. And we feel really good about The outlook, it's just timing is impossible to predict.
spk01: Okay, thanks. And then just, Bob, a follow-up on the – you mentioned the share count impact into 3Q, but just putting everything together just on FAD, am I correct in the ballpark that your 68 cents in the quarter sort of goes to 70, 71 in the back half?
spk03: That's the math that would fit the range, right?
spk01: Yes. Got it. Okay. And then just, sorry, just to clarify, you mentioned the acquisitions that closed in the quarter. That also includes, that's basically the loans as well as the deals that you've done in terms of the impact going forward into 3Q and 4Q, correct? Correct. In terms of the deal that you announced in the 3Q, as you bake that into the run rate, I just wanted to clarify the timing of those deals just so that we can model it out into the third and fourth quarter. We've baked those in. Like I said, all acquisitions completed through July 30th were baked into the guidance. Got it. Okay. Thanks so much, and congrats on a strong quarter.
spk06: Thank you. Our next question is coming from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.
spk11: This is Robin sitting in for Juan. Just curious on Maplewood, why did Washington, D.C. development budget increase by 50 million? Oh, yeah.
spk03: D.C., that really relates to what we've seen in construction costs over the last three years. not just in this industry, but across almost all construction industries, this 25% increase, and it just reflects the fact that when we close this out, that's what it's going to end up costing.
spk10: Okay. And on the sub-1 coverage, what's the expected trend into 25, and how low can this exposure recently get to?
spk03: So I think there's a couple of things that are interesting there. We have a number of operators that the EDARM coverage is above one. And so there's a handful of those operators that I think just naturally work their way out of the bucket, including one larger, the largest operator. And then there's a handful of smaller operators that are currently working through some restructuring activity, and I think They'll come out of the bucket. And we probably settle at less than 2% going into 2025. That would be the goal. And that's normal. If you look at our history for 20 years, we've always had 2% to 4% in that bucket. Thank you.
spk06: Thank you. Our next question is coming from the line of Justin Hasbeek with RBC Capital Markets. Please proceed with your question.
spk09: Yeah, thanks. You mentioned that the new operator for the Guardian assets can continue to pay $2.8 million in total quarterly rent for the remainder of the year. How should we think about this portfolio going forward into next year? And just how volatile could this rent be going forward?
spk14: You know, once again, there's revenue-based kickers, so we could move around. But right now, based upon second quarter results, we think that that's sustainable, and that's what we're going to see going forward.
spk06: Thank you. We'll move on to our next question, which is coming from the line of Alex Fageden with Baird. Please proceed with your question.
spk02: Hello. Good morning. Thank you for taking my question. First, on the Syndet, JV, which you guys bought out, how are the two operators in that portfolio performing? Can you share any metrics about DivaDARM coverage or anything else?
spk03: Their coverage is consistent with what we see in our overall portfolio, so nothing unusual there in terms of underwriting. really cut down the middle type portfolios for us.
spk02: All right. And would you be able to provide an update on the 109 million of other real estate loans that were due in 2024 that were extended from March 29th to June 28th? Were those paid out or any update there?
spk03: Yeah, I mean, it's a fully collateralized loan. There's plenty of liquidity in a market that's a little tough to borrow, and so we were very comfortable extending that loan out.
spk02: But the loan was extended to June 28th. 2024, has that been paid back or extended again?
spk03: You know what, we're all looking at each other, trying to figure out what loan it is. Can I just have Bob circle back with you on that, because I don't want him to state anything.
spk02: Yes, no worries. That's it for me. Thank you, guys.
spk06: Thank you. The next question is coming from Joshua Dennerlein with Bank of America. Please proceed with your question.
spk07: Hi, this is on behalf of Josh. I was wondering if you could also go back to the guardian assets or the new tenants. Just in understanding the mechanics with the rent and I understand with the revenue kicker, is that evaluated throughout the quarter? Is there a certain timing adjustment that we should be thinking that if they're hitting certain revenue goals that that's being evaluated that that would be increased?
spk14: So it was evaluated in the second quarter. As I indicated, they did meet the criterion of having the ticker kicked in to the extent that we reported it. We do believe it's sustainable. It will continue to go forward quarter after quarter throughout the year. There's no more magic to it.
spk07: Or at least does it get re-evaluated from going forward for that excess amount that they could continue to go up?
spk14: Once again, I think that the revenue that they recorded in the second quarter is sustainable, so I don't think it's going to go either up nor down. It's going to pretty much remain flat.
spk07: Okay. Thank you so much. And also in terms of the uptick that we saw in the occupancy and coverage data of your operators, was there any specific at least facility type or operator that's performing better than others or a standout?
spk04: You mean in terms of like SNF versus ALF or?
spk07: Yes.
spk04: I mean, I think, you know, we've historically, since COVID, seen the ALF product come back a little bit quicker, but I think generally speaking, we're seeing census increase at all of them. The SNF is now catching up. Okay.
spk07: Thank you so much.
spk06: Thank you. There are no further questions at this time. I would like to turn the floor back over to Taylor Pickett for closing comments.
spk03: Thanks, everyone, for joining our call today. Please feel free to follow up with the team.
spk06: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. We thank you for your participation.
Disclaimer