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Edited Transcript of OHI earnings conference call or presentation 8-May-19 2:00pm GMT

Q1 2019 Omega Healthcare Investors Inc Earnings Call

Timonium May 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Omega Healthcare Investors Inc earnings conference call or presentation Wednesday, May 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* C. Taylor Pickett

Omega Healthcare Investors, Inc. - CEO & Director

* Daniel J. Booth

Omega Healthcare Investors, Inc. - Secretary & COO

* Jeff Cawley Marshall

Omega Healthcare Investors, Inc. - SVP of Operations

* Michele Reber

Omega Healthcare Investors, Inc. - Senior Director of Asset Management

* Robert O. Stephenson

Omega Healthcare Investors, Inc. - CFO, Treasurer & Assistant Secretary

* Steven J. Insoft

Omega Healthcare Investors, Inc. - Chief Corporate Development Officer

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Conference Call Participants

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* Chad Christopher Vanacore

Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst

* Daniel Marc Bernstein

Capital One Securities, Inc., Research Division - Research Analyst

* Jonathan Hughes

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Karin Ann Ford

MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst

* Lukas Michael Hartwich

Green Street Advisors, LLC, Research Division - Senior Analyst

* Omotayo Tejamude Okusanya

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Trent Nathan Trujillo

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Omega Healthcare Investors First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Michele Reber. Please go ahead.

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Michele Reber, Omega Healthcare Investors, Inc. - Senior Director of Asset Management [2]

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Thank you, and good morning. With me today are Omega's CEO, Taylor Pickett; CFO, Bob Stephenson; COO, Dan Booth; Chief Corporate Development Officer, Steven Insoft; and SVP Operations, Jeff Marshall.

Comments made during this conference call that are not historical facts may be forward-looking statements, such as statements regarding our financial projections, dividend policy, portfolio restructurings, rent payments, financial condition or prospects of our operators, contemplated acquisitions, dispositions or transitions 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 recently issued press release.

I will now turn the call over to Taylor.

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [3]

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Thanks, Michele. Good morning, and thank you for joining our first quarter 2019 earnings conference call. Today, I will discuss our first quarter results and our 2019 earnings guidance, status of the MedEquities acquisition and I will comment on the skilled nursing facility industry in general.

Our adjusted FFO of $0.76 per share is $0.03 more than our fourth quarter 2018 adjusted FFO of $0.73 per share. This improvement was expected and reflects the beginning of our return to a more predictable environment close to 2018's asset repositioning and restructuring activity. We, again, declared a $0.66 per share dividend. Payout ratio is 87% of adjusted FFO and 97% of FAD. As we have indicated in the past, we expect that these payout ratios will continue to strengthen throughout 2019.

Our adjusted FFO guidance remains unchanged with full year guidance of $3 to $3.12 per share and fourth quarter 2019 guidance of $0.78 to $0.81 per share. We will revisit 2019 guidance after we close on the MRT acquisition and have our second quarter results. The skilled nursing facility industry remains challenged, but we believe there is some near-term upside and continue to be optimistic over the long-term, notwithstanding the current challenges facing Daybreak and certain smaller operators. Proposed 2.5% increase in Medicare reimbursement combined with the implementation of PDPM starting in October will provide welcome rate relief and expense savings opportunities. In addition, our senses continues to remain stable with fourth quarter occupancy of 82.8%.

I will now turn the call over to Bob.

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Robert O. Stephenson, Omega Healthcare Investors, Inc. - CFO, Treasurer & Assistant Secretary [4]

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Thanks, Taylor, and good morning. Our reportable FFO on a diluted basis was $144 million or $0.67 per share for the quarter as compared to $147 million or $0.71 per share in the first quarter of 2018. Our adjusted FFO was $161 million or $0.76 per share for the quarter and excludes several items as outlined in our adjusted FFO reconciliation to net income down in our press release, supplemental and on our website.

Operating revenue for the quarter was approximately $224 million versus $220 million for the first quarter of 2018. The increase was primarily a result of incremental revenue from a combination of over $450 million of new investments completed and capital renovations made to our facilities since the first quarter of 2018 as well as lease amendments made during that same time period, revenue related to the Orianna facilities that were transitioned to existing Omega operators in both the third and the fourth quarters of 2018, $972,000 of noncash onetime revenue related to writing off a tenant reserve liability recorded with the Aviv merger that was no longer needed. And lastly, we adopted the new lease accounting standard effective January 1, 2019, which resulted in the recording of $4 million related to tenant real estate taxes and ground lease income. It's important to note, a corresponding offset to operating expenses was booked during the quarter and therefore, this had minimal P&L impact.

The increase in revenue was partially offset by reduced revenue related to asset sales, transitions and loans paid off that occurred throughout 2018, timing of receipts related to operators on a cash basis, a $1.2 million provision for uncollectible straight-line revenue resulting from the transfer of assets from one tenant to another. Please note, the new release accounting standard requires the write-off of straight-line receivables to be recorded as a reduction to revenue instead of a provision for uncollectible accounts receivable. The $224 million of revenue for the quarter includes approximately $15.8 million of noncash revenue.

Our G&A expense was $11.8 million for the first quarter of 2019 and included approximately $1 million in restructuring charges related to the closing of our Chicago office, including severance resulting from the elimination of certain positions. Interest expense for the quarter, when excluding noncash deferred financing cost, was $48 million or the same as the first quarter of 2018 as lower debt balances were offset by a higher blended cost of debt, primarily as a result of higher LIBOR rates. We recorded $7.7 million of impairment on direct financing leases in the first quarter related to the finalization of the Orianna portfolio based on the estimated collectibility of the remaining accounts receivable owed to Omega held in the estate trust. For 2019 guidance and modeling purposes, we are assuming the following major assumptions. On MedEquities, we assume the acquisition will be completed in mid-May. We plan to issue approximately 7.5 million Omega common shares for MedEquities, take on approximately $350 million of additional debt related to the payoff of their existing credit facility and paying $2 per share in cash for each MRT common share. We assume new construction projects will be put into service in accordance with our schedule on Page 7 of our supplemental information posted on our website. We assume noncash quarterly revenue should be between $16 million and $18 million per quarter. We project our G&A for the second quarter of 2019 to be consistent with our first quarter when normalizing for restructuring charges. As legal expenses decrease, we will return to a more traditional $9 million to $10 million per quarter starting in the second half of 2019. Noncash stock-based compensation expense is estimated to continue at approximately $4 million per quarter in 2019. Interest expense, the variability in our interest expense is primarily driven by borrowings on our credit facility and LIBOR rates. At March 31, 19% of our debt or $850 million was floating rate debt.

We assume proceeds from potential asset disposition opportunities will be redeployed at between 9% and 9.5% cash yields. Regarding share issuances, in addition to the 7.5 million common shares to be issued for MedEquities, we assume we'll be issuing approximately $10 million to $15 million of equity per quarter through our dividend reinvestment and common stock purchase plan consistent with our historical issuances.

Lastly, based on our stock price and subject to equity market conditions, we may decide to issue equity under our ATM to continue to delever and fund potential acquisitions. In the first quarter of 2019, we issued or sold approximately 3.1 million shares of Omega common stock generating $111 million in gross proceeds through a combination of our ATM and our dividend reinvestment and common stock purchase plans.

Our balance sheet remains strong. At March 31, approximately 81% of our $4.5 billion in debt is fixed and our net funded debt to adjusted annualized EBITDA was 5.2x and our fixed charge coverage ratio was 3.9x. It's important to note, EBITDA on these calculations has no revenue related to construction and process related to our 8 new builds, which will be operational in the next 12 months. When adjusting for the Daybreak Q1 cash shortfall and the known revenue on the new builds, our pro forma leverage would be roughly 5.0x.

I will now turn the call over to Dan Booth.

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Daniel J. Booth, Omega Healthcare Investors, Inc. - Secretary & COO [5]

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Thanks, Bob, and good morning, everyone. As of March 31, 2019, Omega had an operating asset portfolio of 891 facilities with approximately 89,000 operating beds. These facilities were spread across 68 third-party operators and located within 40 states and the United Kingdom. Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio remain stable during the fourth quarter of 2018 at 1.67 and 1.32x, respectively, versus 1.67 and 1.32x, respectively, for the trailing 12-month period ended September 30, 2018.

Turning to portfolio matters. As discussed previously, 1 of our top 10 operators, Daybreak, has continued to struggle with liquidity issues as a result of labor challenges and a very low Medicaid reimbursement system in Texas. Reimbursement challenges in Texas are not unique to Daybreak and have placed continued pressure on all Texas operators. As reported on our fourth quarter earnings call, Omega and Daybreak entered into a second amendment to our settlement and forbearance agreement effective January 30, 2019, whereby, we granted Daybreak a $2.5 million rent deferral in each of the first 2 quarters of 2019. To date, Daybreak has met their contractual obligations under this agreement. At this point, it remains uncertain given the state of affairs in Texas in the ultimate outcome of any rate relief as to whether a further amendment or extension of the forbearance agreement will be required.

Notwithstanding the uncertainties surrounding rate relief in Texas, we are confident that Daybreak will benefit from several known factors, including the addition of 26 Omega facilities into the Texas QIPP program, the implementation of PDPM and the 2.5% Medicare rate increase. All 3 benefits are slated to become effective on October 1, 2019.

Turning to new investments, as mentioned by Taylor, we are preparing for the upcoming MedEquities merger. From an operational perspective, this involves integrating our respective portfolio management systems, meeting with the existing operators in an effort to better understand their business and identify their capital needs, and identifying opportunities in MedEquities other diverse asset classes.

As a reminder, Omega will be acquiring a portfolio of 34 facilities spread across 7 states and 11 operators, nearly all of which represent new relationships for Omega. This diverse group of operators represents not just skilled nursing providers, but also acute care hospitals, behavioral and rehab hospitals, LTACs, and assisted living facility and a medical office building. We believe the addition of the MedEquities portfolio of high-quality diversified assets will provide Omega with meaningful growth opportunities.

I will now turn the call over to Jeff.

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Jeff Cawley Marshall, Omega Healthcare Investors, Inc. - SVP of Operations [6]

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Thanks, Dan, and good morning, everyone. On April 19, CMS issued its annual proposed SNF payment rule, which included 3 significant elements to be effective at October 1, 2019: one, a net increase of 2.5% in SNF Medicare Part A prospective payment system or PPS rates; two, confirmation that the new PPS Patient-Driven Payment Model or PDPM will replace the existing work for payment methodology at that time; and three, revision of the group therapy definition to align with that used in other post-acute care sites. The 2.5% net rate increase will provide an additional $887 million in Medicare funding to the sector and results from a market basket increase of 3.0% reduced by a mandated multi-factor productivity adjustment of 0.5%. This increase compares favorably to the 1.8% rate increase provided on October 1, 2018 net of the value-based purchasing discount and coupled with inflationary Medicaid rate increases, allows operators to keep pace with the escalation in operating expenses that ran 2.4% in calendar year 2018 within Omega's core portfolio.

PDPM changes the treatment and payment focus for SNF Medicare patients from therapy minutes to patient characteristics and emphasizes the value of the patient clinical outcomes over the volume of services provided. Although CMS has indented this policy change to be budget neutral for the Medicare program, opportunities for operators to yield cost efficiencies in the provision of therapy services and to admit a broader disease cohort of patients, create our cautious optimism that PDPM will positively impact operating margins without adversely affecting patient outcomes. The flexibility for therapist to engage patients in group work in current therapy protocols for up to 25% of total therapy treatments, which provides the best opportunity for cost efficiencies has now been enhanced by a revision to the definition of group therapy from involving 4 patients to involving anywhere from 2 to 6 patients, matching the definition currently used for inpatient rehabilitation facilities.

Finally, with CMS's original notice a year ago that PDPM would be implemented on October 1, 2019, operators have already begun the necessary training, simulation, clinical protocol and technology enhancements and other retooling efforts to facilitate a smooth transition on that date. We do not expect significant transitional problems as a result, though PDPM expertise will certainly build over time.

I will now turn the call over to Steven.

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Steven J. Insoft, Omega Healthcare Investors, Inc. - Chief Corporate Development Officer [7]

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Thanks, Jeff, and thanks to everyone on the line for joining today. In conjunction with Maplewood Senior Living, we continue to work on our ALF memory care high-rise at Second Avenue and 93rd street in Manhattan. The project is expected to cost approximately $285 million, including accrued rent and is scheduled to open in early 2020. Including the land and CIP of our New York City project, at the end of the first quarter, Omega senior housing portfolio totaled $1.5 billion of investment on our balance sheet. Anchored by our growing relationship with Maplewood Senior Living and their best-in-class properties as well as Healthcare Homes in Gold Care in the U.K., our overall senior housing investment now comprises 124 assisted living, independent living and memory care assets in the U.S. and U.K.

On a stand-alone basis, the core portfolio not only covers its lease obligations at 1.17x but also represents one of the larger senior housing portfolios amongst the publicly-listed health care REITs. Our ability to successfully continue to grow this important component of our portfolio is highlighted by our 14 Maplewood facilities and the related pipeline is predicated on coupling our tenant's operating capabilities with our commitment to having in-house design and construction expertise. Through the same capability, we invested $47.6 million in the first quarter in new construction and strategic reinvestment. $41.8 million of this investment is predominantly related to our active construction projects with a total budget of approximately $500 million, inclusive of Manhattan. The remaining $5.8 million of this investment was related to our ongoing portfolio CapEx reinvestment program.

I will now turn the call over to Taylor for some final comments.

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [8]

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Thanks, Steven. We look forward to closing the MRT acquisition and sourcing new growth opportunities in 2019. We are optimistic about the reimbursement and demographic environment and the opportunity for improving tenant results. And with that, I'll open up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jonathan Hughes with Raymond James.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [2]

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You mentioned the pipeline is beginning to pick up, can you just give us some color on the size and maybe asset mix for deals in that pipeline?

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [3]

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Sure. Well, obviously, we have MRT closing, but we've seen a fair amount of activity that shows up on our pipeline reports. Principally, skilled nursing facility assets, the follow-up question to that usually is where cap rates, I'd say that they probably tightened just a little bit. And I would attribute some of that to the tenure moving south of 2.5% and the ability for folks to borrow a little bit cheaper rates. So we think about cap rates, I think, it's still at 9%, but they are a little bit tighter. So hopefully, that answers the question.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [4]

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Yes, it does. And maybe just the size of the pipe, I mean, a couple of hundred million or $400 million to $500 million?

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [5]

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It's really lumpy. So it's hard to think about modeling it out, but we -- I always talk about a good year for us being $1 billion of deal activity, MRT $600 million, I think, we still have the opportunity for a good year.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [6]

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Okay. Got it. And then on MedEquities, I realize you might not be able to comment fully, but on the creative solutions transition, could you maybe talk about how that's progressing since January 1, and so that's a pretty big component of that portfolio?

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Daniel J. Booth, Omega Healthcare Investors, Inc. - Secretary & COO [7]

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Yes. I mean, there's nothing really going on there other than obviously the entire portfolio is going to transition, hopefully, by the end of next week, but there's nothing specific to creative, obviously, MRT did a lot of work around that portfolio with the previous tenant and when they transition it over to creative, obviously, there was a rent reset, if you will, but other than that, there's nothing else going on.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [8]

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I guess, I was maybe asking more so for coverage, but if you can't share that, I understand.

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [9]

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Guys, look, it was the reset rent had relatively ample coverage and to date, we think they're performing at that level.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [10]

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Okay. And then just one more. I know this might be a tough one to answer, but PDPM is supposed to be budget neutral. Most projections for operators, at least those projections I see in the news are positive or breakeven. It sounds like you guys are in the same camp, but is there a chance that revenues would ultimately fall short. I'm just trying to understand the downside to PDPM here since all I ever really hear about is the upside opportunity.

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [11]

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Yes. I think the crosswalk -- so many people have done crosswalks from the old system to the new and it always comes out at or about revenue neutral. So I think on the revenue side, it's very unlikely we see downside from PDPM. And just to be clear, it's -- this is the first time that I've ever spent in this industry where so much time was spent between CMS and the industry in crafting a plan. So I just don't see any surprises.

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Operator [12]

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Our next question comes from Karin Ford with MUFG Securities.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [13]

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Are you feeling better or worse on Daybreak today than you were say, on our last call? Can you give us an update on the status of the Texas nursing facility reinvestment allowance? And what's the overall trends you are seeing on coverage in your properties in Texas and in the Daybreak portfolio?

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Daniel J. Booth, Omega Healthcare Investors, Inc. - Secretary & COO [14]

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Well, I'll start with our -- how we feel about Daybreak, I mean, there are a lot of positive things that we're seeing something that I spoke about in my talking points. One of the big ones is that they are adding 26 additional Omega facilities into the Texas QIPP program. So we expect that you have a very favorable pickup in revenues. PDPM, which we talked about, revenue neutral, but we expect and we hope that they would see some reduction in their expenses. And then, on October 1, we get a Medicare rate increase of about 2.5%, which is -- we hadn't seen in quite some time. We've also seen pick up in Daybreak's skew mix. Just want to hit a low watermark in the third quarter of '18. We've seen it slowly trend up into the first quarter and we're hoping that, that could pick up further or at least stabilize so that's also been a big positive. As far as Texas rate relief, still too early to call. The legislation is still in session. It runs through pretty much the end of May. And we're hopeful that they are able to obtain some rate relief. What form it ultimately takes? We do not know, but I know that they're working around the clock in the State of Texas to try to gate some rate relief for our operators.

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Robert O. Stephenson, Omega Healthcare Investors, Inc. - CFO, Treasurer & Assistant Secretary [15]

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And then only the Texas operators.

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [16]

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Other Texas operators, a lot of them, fortunately, are in other states. So some of their operations in other states are actually subsidizing their Texas operations. The coverage is not stable, but it's just not -- overall, it's above 1:1 but it's below the mean, so as a group.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [17]

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Got it. With a lot of those benefits coming in October, do you think you'll need to give additional rent relief for the third quarter on Daybreak?

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [18]

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If -- once again, if I think at this point, it's too early to call. I want to see how the skew mix shakes out in the second quarter. I want to see what happens in Texas with the rate relief. I mean, because these things don't come into play until October, but it's not just into cash situation, but it's also a long-term prospect situation. We have to look at sort of both and weigh what we're going to do. I mean, you don't want to do something for tomorrow that's off the next quarter and not look to the future and see what's going to come down the -- coming down the road. So we have to take, I think, both of those things into account. And in order to do that, we just have to get as much information as we can.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [19]

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Got it. And then my next question is just on the Manhattan development. It looks like rent commencement got pushed back a quarter there. Have they started pre-leasing, how are rents trending versus underwriting? And can you also talk about the new development you started or the new commitment you have on the development side in Ohio?

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Steven J. Insoft, Omega Healthcare Investors, Inc. - Chief Corporate Development Officer [20]

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On the -- as far as the Manhattan project is concerned, our sales and leasing office -- Maplewood sales and leasing office opened in early part of this year. In advance of what they would typically do with their suburban locations but wanted to educate the market. Increase are very strong. We're confident around price point and see the building being topped off at the end of this year with occupancy starting in the first quarter of 2020.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [21]

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How is it performing? How is it looking so far on the rent side versus underwriting? And then, can you just talk about the new project in Ohio?

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Steven J. Insoft, Omega Healthcare Investors, Inc. - Chief Corporate Development Officer [22]

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The market reaction of the deposit level would suggest that we're on target as far as underwriting of rents. And a little bit too early to tell in terms of the absolute quantum because we did start very early, but we're confident based upon total inquiry and deposits received that we'll be on target for early leasing consistent with underwriting.

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Operator [23]

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Our next question comes from Trent Trujillo with Scotiabank.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [24]

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Bob, I appreciate some of the earlier comments on this, but you mentioned in the press release and earlier here that equity issuance could impact your FFO guidance range. So I'm hoping maybe you could talk about how you're thinking about this since the stock is trading right around just slightly higher than where you issued in the first quarter on average?

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Robert O. Stephenson, Omega Healthcare Investors, Inc. - CFO, Treasurer & Assistant Secretary [25]

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We've always been opportunistic to take advantage of the ATM to help fund the pipeline and we've also been very strong in our conviction that our leverage goal between 4 or 5x and we're currently above that. So to get in our stated goal, I think, we always say 4 to 5x, but it's more like 4.75x the sweet spot there. So we'll take it day by day, but when the post the MRT merger in a week or so and be opportunistic at it, looking at the ATM market.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [26]

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Okay. Maybe just a quick follow-up on this topic. You had no acquisitions in the first quarter. I think that's the first time in multiple years where you didn't have any activity. Is that just a function of reserving the capital for the MRT acquisition because you did state you have a nice pipeline available of SNF portfolios and even though the cap rates have come in a little bit. They haven't changed on the whole, and they are still around 9%. So any thoughts on that would be appreciated.

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Robert O. Stephenson, Omega Healthcare Investors, Inc. - CFO, Treasurer & Assistant Secretary [27]

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Yes, it really wasn't a capital-driven decision. We continue to look at everything that is out there. It's just the weirdness of the cycle frankly. So there is a fair amount sitting out there and hopefully, there is a fair amount that will ultimately be actionable.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [28]

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Okay. And my next question is, just my other one, so CMS just updated its 5-star quality ratings and the broad take away of its star ratings declined on average, not saying that, that's for your portfolio, but just on average. But can you talk about what kind of impact that could have on your operator referral networks giving the shift in quality ratings?

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Robert O. Stephenson, Omega Healthcare Investors, Inc. - CFO, Treasurer & Assistant Secretary [29]

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Jeff, do you want to take this one?

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Jeff Cawley Marshall, Omega Healthcare Investors, Inc. - SVP of Operations [30]

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Sure. Yes, the change in the star ratings really are impacted by CMS is essentially moving the goalpost on quality and staffing demand such that they wanted to ensure the cut points reflect a certain percentage of facilities in each of the 1 through 5 star rating categories. So those changes where 1/3 of the facilities lost a star rating and maybe a 1/6 of the facilities gained a star rating are direct related to those quality and staffing demands, not inspection, but therefore, don't also represent any kind of change in the existing quality or staffing levels of facilities just in CMS changing those attributes. But if operators are already in referral networks, as long as they are maintaining true quality metrics, such as the rehospitalization rates, discharge to community and functional improvements as well as the length of stay metrics, that should override any consideration about a star decline because those relationships had already been established. And we have bundling programs, such as BPCI and CJR, which continue to involve a minor amount of participants and those have a minor impact. We haven't crosswalk to see how many of our operators who might have lost a star, which really would mean if they went below 3 stars, would be impacted. I think the impact is minor.

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Operator [31]

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Our next question comes from Chad Vanacore with Stifel.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [32]

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So this one's for Steven. It looks like you increased the rent estimate for the Manhattan project being inspired with Maplewood from $3.6 million to $3.9 million a quarter. What's the rationale behind that increase?

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Robert O. Stephenson, Omega Healthcare Investors, Inc. - CFO, Treasurer & Assistant Secretary [33]

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Hey, Chad -- then I'll say.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [34]

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Go ahead.

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Robert O. Stephenson, Omega Healthcare Investors, Inc. - CFO, Treasurer & Assistant Secretary [35]

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This is Bob. All of that schedule is dealing -- Chad, is taking the inception-date funding multiplying it by our initial cash yield. So as we spend more money, you'll see that estimated quarterly rent to Omega going up. So at the end of the day, it's going to be on the -- the rent will be on the full investment amount spent, but I was just trying to give direction for guidance on share some with respect today that's in our debt so how much would then generate into quarterly EBIDTA.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [36]

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All right. And then, Taylor, you alluded to updating guidance post MRT close. So what are some of the factors that might change guidance? Is it just timing, which seems pretty clear from here or there are other factors to influx and maybe you can quantify some cost synergies that you expect out of the transaction?

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [37]

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We'd have very little incremental cost from the MRT acquisition, but Chad, it's mostly timing, Chad. And part of the reason I put the comment in there is, with the run rate of $0.76, you just annualize that and you go well why aren't you raising the bottom end of your guidance. So, rather than trying to walking it up over quarter-by-quarter, our view is let's get MRT close. Let's see where our second quarter is, G&A and otherwise, it really give a good perspective of what we think the full year will be. Obviously, with the likelihood at the low end certainly moves up and then, we will evaluate where we are in terms of the high-end.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [38]

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All right. Fair enough. And then one more question is for Bob. So how is your accounts receivable been trending from operators? Any change in payers fee given the headwinds in parts of the industry?

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Robert O. Stephenson, Omega Healthcare Investors, Inc. - CFO, Treasurer & Assistant Secretary [39]

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Yes. Chad, what we did this quarter and we haven't in the past. On the balance sheet, we've broken out our contractual AR breach that just club it together. So now we broke with -- broken at the normal contractual versus straight line. And you can see it's actually improved slightly. And if you go back to the last couple quarters, you can't see a year and you have to trust me, it's actually improved quarter-over-quarter over quarter, but little forward, we'll keep it broken out so it's easier to say.

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Operator [40]

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Our next question comes from Omotayo Okusanya with Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [41]

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Great quarter. Question, the portion of your tenant base, again, that has a rent coverage below 1.2x, again, that inched up a little bit this quarter. Just, kind of, curious what's kind of going on there? And if we just kind of talk in general about, kind of, the status or how you're feeling about some of your tenants within lower rent coverage?

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [42]

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Yes. So quarter-over-quarter, or TTM-over-TTM, we remain flat at 1.32x EBITDAR coverage. We feel good about that, obviously. The percentages within these variants, the way we put them in the different buckets, that does tend to move around and it's really the movement in this quarter was just having 1 operator that was slightly above 1, 2x, goes slightly below 1, 2x and that's really what it was all about. I don't really give it any significance, but it does happen and in the next quarter, we can see it move right back up again.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [43]

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Got it. Okay. That's helpful. And then second of all, I know we've always been talking about this idea about some point demographics that to play a role in improving fundamentals. And I think you guys have been very vocal about that probably happens sooner rather than later. And just curious, if you saw any of that in your portfolio this quarter? And if you did, specifically, what were the circumstances around that?

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [44]

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In this -- I think we see the demographics in the stability and occupancy really when we talk about this in the past. Although length of stay reductions have mitigated to some extent, because they're still out there. And so the one interesting thing that I think you see is, we see Medicaid expenses creeping up a little bit. And the length of stay for Medicaid residents is a lot less controllable than it is for Medicare residents. So I think a little bit of what we're seeing on the Medicaid side is some of the demographics that we are talking about because it's much longer-term and much less controllable in terms of patient intakes and then on the Medicare quality side, all the dynamics we've talked about the shift to Medicare advantage, reduction in the length of stay and you still have days that are pretty consistent Q4 to Q1 that makes us feel good right now.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [45]

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Got it. Last one for me, if you could indulge me. Again, you, kind of, have a situation where the CMS proposal, PDPM should be net positives. You've talked a little bit about demographics becoming a little bit more positive. Acquisition outlook seems to be pretty positive as you're hoping to get to a $1 billion. But Taylor, you, kind of, still mentioned on the call, you still see the skilled nursing outlook as being challenging. So I'm just kind of curious about the juxtaposition between those 2 things. Where do you still, kind of, seeing a challenging outlook? Is this specifically because of Texas or some the stuff going on in Medicaid wise? I'm just, kind of, curious, that the areas where you're still, kind of, expressing some caution.

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [46]

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I think labor is going to continue to be a pressure point near term. And a little bit of my commentary is around the fact that it's May, and so a lots of good things are starting in October and the cash flow generated by those good things won't start until December. So we've got half a year of -- here to there and labor cut in the backdrop and you mentioned it, Texas, hopefully, we get something out in the State of Texas that's reasonably positive. Otherwise, that will continue to be a battle for the Texas operators. So in a short term, the next 6 months, we got to get through. But I think, as we look into 2020, other than the labor issue likely continuing, we feel really good about the rest of the dynamics in our industry.

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Operator [47]

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Our next question comes from Lukas Hartwich with Green Street Advisors.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [48]

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You, kind of, touched on this already, but occupancy has picked up sequentially and I am just curious if that was a shift in Medicaid that you're just talking about or is there something else that drove that?

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [49]

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Nothing. It's -- well, it's not even a shift in Medicaid. It's just Medicaid being additive. Because you could do all the math, Medicare on a days basis is pretty steady. So the incremental population is coming from Medicaid patients. Again, we look at occupancy moving up particularly in Q4 as a very good sign.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [50]

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Great. And then in terms of MRT, do you have a sense if Baylor is going to exercise its purchase option later this year?

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [51]

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Our sense is that it's unlikely that they're going to exercise the option. As we've discussed in the past in individual meetings, we're prepared for the event if they do so the options that are at a 6.5% cap rate, and we redeploy those proceeds at 9%. But we like the relationship and we think there might be some opportunities there.

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Operator [52]

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Our next question comes from Daniel Bernstein with Capital One.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [53]

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I wanted to switch gears a little bit to seniors housing and how you're thinking about the prospects for that industry today and maybe some updated thoughts on whether you would consider more value-add assets in [Ryder] or would you, kind of, seeking out triple net acquisitions at this point in that particular subsector?

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [54]

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Yes. I think for us, Dan, it's what you said, it's what's the right entry point for us in that business. We'll continue to lever into our Maple -- and support our Maplewood relationship just because it's such a huge value creator and we continue to look for, is there the right entry point into senior housing so with other potential operators and we just can't get our arms around risk-adjusted returns. And you, sort of, have expected caps rates to move up given the dynamics of that industry and they really have it. That being said, we also are looking at other value-add opportunities where our portfolios are below normal occupancies and there are markets which you can look at and get comfortable with and we just haven't found any of those opportunities.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [55]

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Okay. And then, switching back to skilled nursing, you made some earlier comments about PDPM being more revenue neutral, but I think the positivity around that has been more around the margins side. So is that -- that positive view on margins, especially on rehab, I suppose, is that what you are still hearing from your operators and how might that translate into lease coverage as we progress into 2020 I know that's far off. And there are a lot of variables in there such as labor, but how are you thinking that lease coverages might progress for '19 and then into '20 given some of the PDPM and the 2.5% market basket increase?

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [56]

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Yes, it's a totally fair question. It is all on the expense side or predominantly the expense side and obviously across the margin, just as you'd described. We got through our entire portfolio operator by operator and every operator has positive margin impacts from PDPM, but the range is pretty wide and it goes from a low of 0.02 of coverage to a high of 0.11 of coverage. And you can basically take the midpoint of that range and think about that as an improvement in coverage. In terms of the 2.5% on the Medicare side -- on the revenue side, frankly, I look at that go -- that's going to offset the labor pressures. So I would be hesitant to go ahead and model that through coverages thinking in about '20.

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Operator [57]

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(Operator Instructions) At this time, there are no further questions in the questions queue. I would like to turn the conference back over to Taylor Pickett for any closing remarks.

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C. Taylor Pickett, Omega Healthcare Investors, Inc. - CEO & Director [58]

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Thanks, Sean, and thanks, everyone, for attending our call today. We will stand ready with any follow-up questions.

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Operator [59]

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