Michelle Reiber - Investor Relations Taylor Pickett - Chief Executive Officer Robert Stephenson - Chief Financial Officer Daniel Booth - Chief Operating Officer.

Nick Yulico - UBS Andrew Rosivach - Goldman Sachs Kevin Tyler - Green Street Advisors Chad Vanacore - Stifel George Hoglund - Jefferies.

Good morning, and welcome to the Omega Healthcare Investors third quarter earnings for 2014 conference call. (Operator Instructions) I would now like to turn the conference over to Michelle Reiber. Please go ahead..

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 restructuring, 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.

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..

Thanks, Michelle. Good morning and thank you for joining Omega's third quarter 2014 earnings conference call. Adjusted FFO for the third quarter is $0.73 per share, which is a $0.04 increase from second quarter adjusted FFO of $0.69 per share.

Adjusted funds available for distribution, FAD, for the quarter is $0.67 per share, which is also a $0.04 increase from the second quarter FAD of $0.63 per share. The increase in adjusted FFO and FAD is directly related to new investments closed during the second and third quarter. We increased our quarterly common dividend to $0.52 per share.

This is a 2% increase from last quarter and an 8% increase from the third quarter 2013. We've now increased the dividend nine consecutive quarters. The dividend payout ratio is 71% of adjusted FFO and 78% of FAD.

We've maintained our 2014 FAD guidance range of $2.58 to $2.61 per share and our 2014 adjusted FFO guidance range of $2.82 to $2.85 per share. We have not included any additional acquisitions in our guidance.

We expect that our fourth quarter adjusted FFO and FAD will be approximately $0.01 lower than the third quarter adjusted FFO and FAD, as a result of the $250 million, 4.5% 10-year bond deal that we sold in September, with the proceeds used to pay down lower interest rate revolver debt. Bob will now review our third quarter financial results..

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $93.9 million or $0.73 per share for the quarter as compared to $70.3 million or $0.59 per share for the third quarter of 2013.

As Taylor mentioned, our adjusted FFO was $94 million or $0.73 per share for the quarter, and excludes the impact of a $1.6 million gain related to the early extinguishment of debt; $2 million of non-cash stock-based compensation expense; $585,000 of one-time cash revenue; and $259,000 of expense associated with acquisitions.

Further information regarding the calculation of FFO is included in our earnings release and on our website. Operating revenue for the quarter was $130.7 million versus $103.3 million for the third quarter of 2013.

The increase was primarily a result of incremental revenue from a combination of new investments completed since the third quarter of 2013, capital improvements made to our facilities and lease amendments made during that same time period. The $130.7 million of revenue for the quarter includes approximately $9.4 million of non-cash revenue.

We expect the non-cash revenue component to be between $8.5 million and $9.5 million per quarter for 2015.

Operating expense for the third quarter of 2014, when excluding acquisition-related cost, stock-based compensation expense, impairments and provision for uncollectible accounts receivable, was $34.1 million, slightly less than our third quarter a year ago. Our G&A was $4 million for the quarter and in line with prior quarters.

We project our 2014 annual G&A expense to be approximately $16.5 million, assuming no extraordinary transactions or unusual events. As outlined in our press release issued yesterday, during the quarter we recorded a $2.1 million real estate impairment charge to reduce one facility's book value to its estimated sales price.

Interest expense for the quarter, when excluding non-cash deferred financing cost and refinancing cost, was $30.9 million versus $24.5 million for the same period in 2013. The $6.4 million increase in interest expense resulted from higher debt balances associated with financings related to new investments completed in 2013 and 2014.

Turing to the balance sheet. In September, we issued and sold $250 million 4.5% senior unsecured notes due 2025. Proceeds from this offering were used to repay outstanding balances under our revolving credit facility. In September, we paid $34 million to retire four mortgage loans guarantee by the Department of Housing and Urban Development.

The loans were assumed as part of our 2012 acquisition and had a blended interest rate of 6.39%. The payoff resulted in a $1.6 million net gain and is classified as interest refinancing gain on our income statement.

For the nine month period ended September 30, 2014, under our equity shelf programs and our dividend reinvestment and common stock purchase plan, we issued combined 3.8 million shares of our common stock, generating gross cash proceeds of $130 million.

For the three months ended September 30, 2014, our funded debt to adjusted pro forma annualized EBITDA was 4.5x and our adjusted fixed charge coverage ratio was 3.9x. I'll now turn the call over to Dan..

Thanks, Bob, and good morning, everyone. As of the end of the third quarter 2014, Omega had a core asset portfolio of 562 facilities with approximately 61,000 operating beds, distributed among 50 third-party operators, located within 37 states.

Trailing 12-month operator EBITDARM remained stable during the second quarter at 1.8x as of June 30, 2014, versus 1.8x as of March 31, 2014. Trailing 12-month operator EBITDAR coverage also remained stable at 1.4x for the second quarter versus 1.4x as of March 31.

We continue to be optimistic that our overall portfolio coverage ratios will remain relatively stable over the course of 2014. Turning to new investments. During the third quarter of 2014, Omega completed $32.4 million of new investments, including capital expenditures. The investments involved two separate transactions.

As previously announced, on July 1, 2014, the company purchased one skilled nursing facility from an unrelated third-party for approximately $8.2 million, and leased it to an existing operator of Omega. The 125 bed SNF, located in Texas, was combined into an existing master lease with an initial yield of 9.75%.

On July 31, 2014, Omega purchased one skilled nursing facility from an unrelated third-party for approximately $17.3 million, and leased it to an existing operator of the company. The 132 beds skilled nursing facility, located in South Carolina, was combined into an existing master lease with an initial yield of 9.5%.

In addition to the aforementioned transactions, the company also invested approximately $7 million under its capital renovation program in the third quarter of 2014. Omega continues to see a steady pace of investment opportunities. And as of today, Omega has a combination of revolver availability and cash totaling approximately $1 billion..

Thanks, Dan. We'll now open the call up for questions..

(Operator Instructions) Our first question is from Nick Yulico from UBS..

I was hoping if you can just give a little bit of an update on the acquisition pipeline as you see it today. I guess third quarter, I think was a little slower quarter. What does it look like right now as far as larger portfolios out there available for sale? I think there's one that at lease sort of in $300 million range.

And what do you think seeing on cap rates for those acquisitions as well?.

So our pipeline remains robust, as I indicated. Our acquisition history has always been and remains choppy. I mean it just depends on, I guess, quarter-to-quarter. We're still looking at a lot of deals. There are still a lot of deals out in the market. Cap rates have come in a little bit.

We're still seeing sort of smaller portfolio deals, where we slip into existing relationships. With cap rates in the 9s, you've got some slightly larger deals out in the market, what I'll call, medium-sized deals in $200 million, $300 million, $400 million range.

I think those are probably looking -- you're looking at something in the 8s in terms of cap rates. And then, I don't know if any, but in the large portfolio deals, we saw one last quarter, the giant portfolio deals, I think they are being underwritten in 7s. So it's kind of where we stand with our pipeline and where we see cap rates as of today..

And you mentioned, I think you said a couple medium-sized deals that are being shopped right now in the market that could, I mean, possibly close over the next couple of quarters, if you chose to purchase them?.

We know a couple. I'm not sure that I would say they were shopped..

And then going back to this question of EBITDAR coverage and I was wondering if you've ever done the math or maybe you could help us out here to think about what's the true sort of coverage for tenants, after you factor in any sort of CapEx obligation they have on their leases or the amount of money they might be funding into your facilities? And then, also any light you might be able to shed on the leverage profile of your tenant base as well?.

In terms of CapEx, it's typically basis point. So when you think about a coverage of 1.4x, if you factor in CapEx spend, its 0.05x, so 1.35x. At the most its 0.1x, so 1.3x. And obviously, CapEx varies, depending on the vintage of the facility. In terms of tenant leverage --.

Can I just pause right there, because a lot of our tenants, as matter of fact, most of our tenants, CapEx runs through their P&L. I mean, expense it's not a true CapEx. So a lot of that, what you call, what we call, the CapEx, and what you think of as CapEx is already factored into the numbers.

So they hit it with another 0.5 or 0.1 is probably a little bit conservative..

And in terms of the leverage profile, most of the regional operators that we do business with don't have debt outside of their lease obligations other than AR-type debt, which is typically advance rates or what, Dan, 60%?.

65% to 75%..

So they really know incremental leverage other than the leverage that they will put on AR assets, and that's pretty much universal. The only big public tenant we have or will be public is Genesis..

And then just lastly a couple of just other questions here is on, the assets held for sale in the balance sheet.

I mean, how many assets and beds are those?.

We have one facility held for sale and one partial land held for sale, and it's roughly $6.6 million combined. And we did not sell anything in the quarter. The one little, $20,000 charge was for expenses coming through from a prior sale in the second quarter..

And then the asset that got closed I guess, and was impaired. You had one this quarter and I think you had one in the second quarter as well.

What's going on with those assets?.

We just had two facilities with the same operator in the exact same market. The market really didn't support two facilities. They closed one, moved the residents over to the other. Our rent was not reduced. The facility was antiquated. It will be sold for the land value. It makes sense from our operator's perspective.

We applied, and once again the rent didn't change. So part of our master lease..

Our next question is, Andrew Rosivach, Goldman Sachs..

I know you've flagged this before, but maybe you could talk about you've got an amazing amount of debt coming -- or excuse me, prepayable next year. You've got the $200 million of 7.5% and you have the $575 million that's coming due in October.

If maybe you can give an idea, I know you need to be in the window, but if those are refi opportunities, if funding cost stay where they are, and kind of maybe how far funding cost could potentially move before it still wouldn't make sense to take them out..

Well, just to recap of what you said. We've got $200 million of 7.5% bonds that are callable February 2015 and $575 million of 6.75% bonds that are callable in October 2015, and these are call features on bonds, they mature in '20 and '22. So we have a lot of flexibility as to when we do whatever we elect to do.

But if the yield curve holds and the markets are available, I mean you look at refinancing, both of those with something with a four-handle, 4.5%, 4.75% type percent. So we will get a range of opportunity there, even if the rates move into the low 5s, of somewhere between $16 million and $20 million of interest expense pick up.

Of course, its run rate based, so it's all going to depend on timing. But if the yield curve holds, that's the run rate basis, once those refis happen..

Our next question is, Michael Knott, Green Street Advisors..

This is Kevin Tyler in for Michael Knott. I just wanted to follow-up on Nick's question.

You said cap rates generally have come down and we've seen that across the healthcare sector with NAV premiums generally shrinking pretty quickly, but you guys still garner a substantial premium, and I was curious, your thoughts as cap rates move down, how you think about acquisitions going forward and do you have any concern that your pricing power might evaporate?.

Well, the cap rates that Dan talked about, we've seen the last six months or so, we haven't seen any further push. And so we think the market is kind of settled where it is. And you still have a very fragmented industry with ongoing consolidation and really the ability to take advantage of those opportunities leverage into our multi-tenant model.

So our view is, those one, two, three, four facility deals that price in the 9s will continue to be available. And the bigger portfolios are going to get a little bit more of a premium in terms of cap rates. But given our cost of 10-year bond that is 4.5%, it's still very attractive from a spread basis..

And then, in terms of the competitive environment, generally have you guys seen a lot of other investor types interested that haven't typically been around in the skilled nursing space in the past, those looking for purely yield?.

We really haven't %seen other investors in direct competition for skilled nursing facility assets. We continue to see peer competitors and non-traded REIT competitors. And Dan, maybe you can add to that, but I'm not aware of anybody now..

No. The arena has sort of stayed the same for last 12 months..

And then just shifting gears a little bit. There has been a lot of curiosity in the marketplace and at NIC around the post-acute model after the recent HCN deal.

But can you elaborate a little bit on your portfolio in terms of mix versus post-acute versus long-term care and maybe how you think about the post-acute model going forward in the shorter stay beds?.

Well, I think that we've seen more specialty build activity focused on pure post-acute in certain markets that have enough depth to handle it.

And so I think we'll continue to see some component of that market in -- or some component of that model in certain markets, but frankly I think the traditional model where you have a major part of the building serving long-term care type stay-patients, Medicaid patients with 20-30 Medicare residents, that model is going to continue to be a principle model in our business..

And then last one for me. Just if you can elaborate a little bit on their specialty hospital portfolio and maybe just plans for that moving forward.

No, it's not a large piece of your business, but was curious where you see that in maybe a year from now?.

I don't see it changing at all. Typically -- or not typically, those specialty hospitals are part of larger master lease relationships. We built one a number of years ago in the Ohio market.

We've acquired others as part of bigger transactions, and typically they just fit into the market that are existing, skilled nursing facility operators running, there are some referrals, cross referrals, but it's really not key component to our ongoing model..

They're usually on the same campus or even connected to an adjacent skilled nursing facility..

Our next question is, Chad Vanacore from Stifel..

It looks like that South Carolina snip that you brought on a per bed basis, you spent a premium price on it.

Can you give us a little detail about what warranted it, was it better payer mix or the age of the asset?.

No, maybe I should go on into a little bit more detail. There was one building that closed in the quarter, but it actually was part of a three facility deal. The other two facilities closed in the previous quarter. It was bifurcated because of payoff of some debt.

So we pushed a lot of the proceeds to the facility that had a layer closed, so it looked a little bit different. It wasn't as high per bed as it might have looked.

The overall deal penciled about to 109 per bed, which in South Carolina is not unusual, whereas it looked like it was much harder than that for the single facility, but it really was part of a three facility acquisition..

And then on the couple of deals you did this quarter, what kind of escalators did you put into the contracts?.

2.5%..

Our next question is, George Hoglund, Jefferies..

Just couple of questions. I'm just wondering what your outlook is on census going forward, given the observation days rule..

We've seen some movement in census, but for the most part our operators have pointed to just normal cyclicality, not so much the three day rule. I am sure that's been a culprit to some degree, but our census has actually come up. We point to the cyclical nature of our business.

So at this point, I don't have any specific comments on what if any effect it's having on our overall census or what it will have in the future. It's modest is the word I'm hearing..

And then just going back to the potential refinancings is in 2015, sort of what's your willingness to potentially do a bond deal early and take some dilution just to lock in a rate?.

I mean, we have no sense that the yield curve is going to spike away from us. But I think your question is fair. And I'll add, it's just going to be market conditions at the time and our windows in terms of being able to access the capital markets.

So I wouldn't necessarily rule it out, but I think we'd have to just look at the circumstances at the time we were thinking about market..

And then just my last one.

What's the outlook for potential facility closings or other sales of troubled facilities?.

There are none on our radar screen at this point. I mean we do have lightning strike from time to time, but there's really, maybe there's one out there, but there are no material asset closings that we see in the near future..

And just nothing that's going to affect our rent streams..

Having no questions. This concludes our question-and-answer session. I would like to turn the conference back over to Taylor Pickett for any closing remarks..

Thank you for joining our call today. Bob will be available for any follow-up questions you may have..

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